Working Paper: NBER ID: w22863
Authors: Alberto Alesina; Gualtiero Azzalini; Carlo Favero; Francesco Giavazzi; Armando Miano
Abstract: Using data from 16 OECD countries from 1981 to 2014 we study the effects on output of fiscal adjustments as a function of the composition of the adjustment – that is, whether the adjustment is mostly based on spending cuts or on tax hikes – and of the state of the business cycle when the adjustment is implemented. We find that both the “how” and the “when” matter, but the heterogeneity related to the composition is more robust across different specifications. Adjustments based upon permanent spending cuts are consistently much less costly than those based upon permanent tax increases. Our results are generally not explained by different reactions of monetary policy. However, when the domestic central bank can set interest rates – that is outside of a currency union – it appears to be able to dampen the recessionary effects of consolidations implemented during a recession.
Keywords: No keywords provided
JEL Codes: H60; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| composition of fiscal adjustments (E62) | economic output (E23) |
| timing of fiscal adjustments (E62) | economic output (E23) |
| permanent spending cuts (H56) | output losses (D57) |
| permanent tax increases (H29) | output losses (D57) |
| fiscal adjustments during recession (E62) | output effects (E23) |
| fiscal adjustments during expansions (E62) | output effects (E23) |
| monetary policy response (E52) | recessionary impacts during tax-based consolidations (E62) |