Macroeconomic effects of fiscal consolidation on economic activity in SSA countries

Gabriel Temesgen Woldu and Izabella Szakálné Kanó

The Journal of Economic Asymmetries, 2023, vol. 28, issue C

Abstract: This paper studies the effects of fiscal measures in 40 sub-Saharan countries on economic output, unemployment, consumption, private investment, REER, and current account balance. The study estimates impulse response functions with local projections, based on a yearly dataset covering 40 countries over 2000–2019. The key variable in the dataset is a measure of fiscal stance computed following Blanchard (1993), with a threshold of 1.5%. The study finds that in the short run, fiscal consolidation reduces real GDP and private demand. In addition, the current account balance responds positively to a shock in fiscal consolidation, whereas the real effective exchange rate responds negatively. Moreover, compared with revenue-based consolidations, spending-based consolidations lead to smaller losses in output. Our finding also reveals that fiscal consolidations also depend on economic cycles, with a lower output loss during an economic boom. Finally, this study suggests that fiscal consolidations should be carried out based on spending-based consolidations and have to be preceded by an economic boom.

Keywords: Cyclically adjusted primary balance; Fiscal consolidation; Local projection method; Sub-Sahara African countries (search for similar items in EconPapers)
JEL-codes: C23 C33 E21 E62 H5 H62 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:28:y:2023:i:c:s1703494923000245

DOI: 10.1016/j.jeca.2023.e00312

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