Working Paper: CEPR ID: DP13017
Authors: Edoardo Briganti; Carlo A. Favero; Madina Karamysheva
Abstract: A large and increasing body of empirical evidence has established that fiscal adjustments based on government spending cuts are less costly in terms of losses in output growth than those based on tax increases. We show that the propagation of fiscal adjustment plans through the industrial network can in theory explain this evidence and that it does so in practice for the US economy. The heterogenous effects of tax-based and expenditure-based adjustments might depend on the difference in their propagation channels in the network of industries. A tax-based adjustment plan is mainly a supply shock whichpropagates downstream (from supplier industries to customer industries) while an expenditure based plan is a demand shock which propagates upstream (from customer industries to supplier industries). Empirical investigation of these channels on US data based on Spatial Vector Autoregressions reveals that tax based plans propagate through the network with an average output multiplier of close to -2, while the propagation of expenditure based plans does not lead to any statistically significant effect on growth.
Keywords: industrial networks; fiscal adjustment plans; output growth
JEL Codes: E60; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax-based adjustments (H20) | increased output in downstream industries (L69) |
| expenditure-based adjustments (H59) | no significant effect on growth (O40) |
| tax-based adjustments (supply shocks) (H31) | downstream propagation (C69) |
| expenditure-based adjustments (demand shocks) (E00) | ineffective upstream propagation (D52) |