Action-Based Fiscal Consolidations and Economic Growth

Markus Brueckner ()
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Markus Brueckner: Research School of Economics, Australian National University, Acton, Canberra 0200, Australia
Authors registered in the RePEc Author Service: Markus Brueckner

JRFM, 2024, vol. 17, issue 5, 1-27

Abstract: This paper tests the hypothesis that action-based fiscal consolidations have a negative effect on GDP growth. Using the IMF’s dataset on action-based fiscal consolidations, instrumental variables’ regressions show that action-based fiscal consolidations have a significant positive effect on GDP growth. The instrumental variables’ regressions also show that action-based fiscal consolidations significantly increase investment and productivity. The findings presented in this paper thus strongly reject the hypothesis that action-based fiscal consolidations reduce growth. The paper argues that least squares estimates presented in previous literature suffer from negative reverse causality bias: GDP growth has a significant positive effect on both the likelihood and the magnitude of action-based fiscal consolidations. To uncover causal effects of action-based fiscal consolidations, researchers need to use an instrumental variables approach.

Keywords: fiscal consolidations; GDP growth; identification; narrative approach; simultaneous systems of equations (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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