Working Paper: NBER ID: w5730
Authors: Alberto Alesina; Roberto Perotti
Abstract: This ppaer studies how the composition of fiscal adjustments influences their likelihood of success, defined as a long lasting deficit reduction, and their macroeconomic consequences. We find that fiscal adjustments which rely primarily on spending cuts on transfers and the government wage bill have a better chance of being successful and are expansionary. On the contrary fiscal adjustments which rely primarily on tax increases and cuts in public investment tend not to last and are contractionary. We discuss alternate explanations for these findings by studying both a full sample of OECD countries and by focusing on three case studies: Denmark, Ireland and Italy.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Type 1 fiscal adjustments (E62) | lasting reduction in deficits (H62) |
| Type 1 fiscal adjustments (E62) | expansionary economic effects (F69) |
| Type 2 fiscal adjustments (E62) | temporary consolidation (G33) |
| Type 2 fiscal adjustments (E62) | contractionary effects (H31) |
| Type 1 fiscal adjustments (E62) | credibility effects on consumption (D12) |
| Type 1 fiscal adjustments (E62) | wealth effects on consumption (E21) |
| Type 1 fiscal adjustments (E62) | enhanced consumer confidence (D12) |
| Type 1 fiscal adjustments (E62) | increased spending (H56) |
| Type 1 fiscal adjustments (E62) | long-term fiscal stability (E62) |