Working Paper: CEPR ID: DP9105
Authors: Alberto F. Alesina; Carlo A. Favero; Francesco Giavazzi
Abstract: Fiscal consolidations achieved by means of spending cuts are much less costly in terms of output losses than tax-based ones. The difference cannot be explained by accompanying policies, including monetary policy, and it is mainly due to the different response of business confidence and private investment. We obtain these results by studying the effects of the adoption of fiscal consolidation plans (rather than isolated shocks), that is combinations of tax increases and spending cuts, some unanticipated, other anticipated, in a sample of 16 OECD economies.
Keywords: confidence; fiscal adjustment; investment; output
JEL Codes: E62; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| spending-based fiscal adjustments (E62) | milder and shorter recessions (E32) |
| tax-based fiscal adjustments (E62) | prolonged and deeper recessions (E65) |
| response of private investment (F21) | output effects of fiscal consolidations (E62) |
| business confidence (E32) | output effects after spending cuts (E62) |
| consumer confidence (D12) | output effects after spending cuts (E62) |
| spending-based adjustments (H61) | less costly in terms of output losses (D24) |
| fiscal adjustments (E62) | economic cycles (E32) |