Working Paper: NBER ID: w18336
Authors: Alberto Alesina; Carlo Favero; Francesco Giavazzi
Abstract: The present paper argues that the correct experiment to evaluate the effects of a fiscal adjustment is the simulation of fiscal plans rather than of individual fiscal shocks. The simulation of the fiscal plans adopted by 16 OECD countries over a 30-year period supports the hypothesis that the effects of consolidations depend on their design. Fiscal adjustments based upon spending cuts are much less costly, in terms of output losses, than tax-based ones. Fiscal adjustments have especially low output costs when they consist of permanent rather than stop and go. The difference cannot be explained by accompanying policies, including monetary policy, and appears to be mainly due to the different response of business confidence and private investment.
Keywords: Fiscal consolidations; Output effects; Public finance
JEL Codes: E62; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal adjustments based on spending cuts (E62) | Significantly lower output losses (F69) |
| Tax-based adjustments (H20) | Prolonged and deep recessions (E32) |
| Permanence of spending cuts (E62) | Minimizing output costs (D24) |
| Differences in output effects between tax-based and spending-based adjustments (H31) | Influences economic outcomes (F69) |
| Response of private investment (E22) | Output effects of fiscal consolidations (E62) |