Working Paper: NBER ID: w23385
Authors: Alberto Alesina; Omar Barbiero; Carlo Favero; Francesco Giavazzi; Matteo Paradisi
Abstract: We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, with details on over 3500 measures for 16 OECD countries. We show that government spending cuts and cuts in transfers are much less harmful than tax hikes, despite the fact that non-distortionary transfers are not classified as spending. Standard New Keynesian models robustly match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigate the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices.
Keywords: Fiscal consolidations; Macroeconomic effects; Government spending cuts; Tax hikes
JEL Codes: E62; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending cuts (H56) | economy (O51) |
| tax hikes (H29) | economy (O51) |
| tax-based adjustments (H20) | deeper and longer-lasting recessions (E32) |
| spending-based fiscal consolidation (E62) | output losses (D57) |
| persistent government spending cuts (H56) | milder recessionary effect (E65) |
| persistent tax hikes (H29) | larger shifts in aggregate supply (E23) |