Does Uncertainty Matter for the Fiscal Consolidation and Investment Nexus?

Ioannis Bournakis and Nelson R. Ramírez-Rondán

The B.E. Journal of Macroeconomics, 2024, vol. 24, issue 1, 529-559

Abstract: The aim of this research paper is to investigate whether there are non-linearities in the relationship between fiscal consolidation and investment. To achieve this, we take into account the overall state of the economy, as represented by the level of uncertainty. We analyzed a sample of 27 OECD countries from 1996 to 2019 and identified two different regimes of low and high uncertainty. We found that the relationship between fiscal policy and investment is significantly different in these two regimes. In the low uncertainty regime, fiscal tightening has no significant effect on investment. In contrast, in the high uncertainty regime, fiscal tightening has a negative impact on investment, which is three times larger than in the low uncertainty regime. Our results are robust, and have been confirmed through a range of sensitivity tests.

Keywords: fiscal policy; real sector; threshold model; panel data (search for similar items in EconPapers)
JEL-codes: C33 D81 E62 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (2)

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Working Paper: Does uncertainty matter for the fiscal consolidation and investment nexus? (2023)
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DOI: 10.1515/bejm-2023-0059

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