Working Paper: NBER ID: w17844
Authors: Huixin Bi; Eric M. Leeper; Campbell B. Leith
Abstract: The paper explores the macroeconomic consequences of fiscal consolidations whose timing and composition are uncertain. Drawing on the evidence in Alesina and Ardagna (2010), we emphasize whether or not the fiscal consolidation is driven by tax rises or expenditure cuts. We find that the composition of the fiscal consolidation, its duration, the monetary policy stance, the level of government debt and expectations over the likelihood and composition of fiscal consolidations all matter in determining the extent to which a given consolidation is expansionary and/or successful in stabilizing government debt.
Keywords: Fiscal Consolidation; Macroeconomic Policy; Government Debt
JEL Codes: E3; E31; E52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| composition of fiscal consolidations (E62) | economic growth (O49) |
| spending cuts (H56) | economic growth (O49) |
| tax increases (H29) | economic growth (O49) |
| duration of consolidation (C41) | success in stabilizing government debt (H63) |
| monetary policy stance (E63) | outcomes of fiscal consolidations (E62) |
| anticipated tax increases (H29) | inflationary pressures (E31) |
| expectations about timing and nature of fiscal consolidations (H68) | consumption behavior (D10) |
| unexpected delays in tax-based consolidations (H26) | negative consumption shocks (E21) |
| delayed fiscal consolidations (E62) | expansionary outcomes (E60) |
| agents expect tax-based consolidations (L85) | agents expect spending-based consolidations (L85) |