The effects of Fiscal Consolidations: Theory and Evidence

Carlo Favero, Francesco Giavazzi, Alberto Alesina, Matteo Paradisi and Omar Barbiero

No 12016, CEPR Discussion Papers from Centre for Economic Policy Research

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, finding details on over 3500 measures. Government spending and transfer cuts are much less harmful than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigates the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices. This channel explains different sizes of multipliers found in fiscal stimuli compared to consolidation plans.

Keywords: Fiscal consolidation plans; Fiscal multipliers (search for similar items in EconPapers)
JEL-codes: E62 (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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Citations: View citations in EconPapers (73)

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Working Paper: The Effects of Fiscal Consolidations: Theory and Evidence (2017)
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