Working Paper: CEPR ID: DP14072
Authors: Carlo A. Favero; Pierfrancesco Mei
Abstract: This paper studies the impact of multi-year fiscal consolidation planson public debt dynamics. Studying the dynamic impact of narratively identified fiscal adjustment plans we find that tax based adjustmentsresult in significant slowdowns of output and inflation but have almostno effect on the debt GDP ratio over a short to medium-term horizon. Spendingcuts have instead milder recessionary effects,but contribute to a sustained reduction in the debt GDP ratio. Extendingour model to study non-linearities in the dynamics related to thebusiness-cycle and the public debt to GDP ratio, we find that theheterogeneous impact of tax-based and expenditure-based plans on debtmainly emerges mostly in recessions and when debt is increasing rapidly.
Keywords: austerity; public debt; output growth; fiscal adjustment plans
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) | slowdown in output (E23) |
| tax-based adjustments (H20) | slowdown in inflation (E31) |
| tax-based adjustments (H20) | debt-to-GDP ratio (H68) |
| expenditure-based adjustments (H59) | slowdown in output (E23) |
| expenditure-based adjustments (H59) | debt-to-GDP ratio (H68) |
| expenditure-based adjustments (H59) | debt-to-GDP ratio (baseline comparison) (H68) |
| tax-based adjustments (H20) | debt-to-GDP ratio (self-defeating in low-interest environment) (H63) |
| heterogeneous impact of tax-based and expenditure-based plans (H31) | debt (H63) |