Working Paper: NBER ID: w18779
Authors: Olivier J. Blanchard; Daniel Leigh
Abstract: This paper investigates the relation between growth forecast errors and planned fiscal consolidation during the crisis. We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters. The weaker relation in more recent years may reflect in part learning by forecasters and in part smaller multipliers than in the early years of the crisis.
Keywords: Fiscal Policy; Economic Growth; Forecast Errors; Fiscal Multipliers
JEL Codes: E32; E62; H20; H5; H68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal consolidation forecasts (H68) | Growth forecast errors (H68) |
| Stronger planned fiscal consolidation (H69) | Lower than expected growth (O49) |
| Fiscal consolidation (E62) | Lower growth in private consumption (E20) |
| Fiscal consolidation (E62) | Lower growth in investment (E22) |
| Underestimated fiscal multipliers (E62) | Lower growth (O41) |
| Fiscal consolidation forecasts (H68) | Causal impact of fiscal policy on economic growth (E62) |