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What drives the short-run costs of fiscal consolidation? Evidence from OECD countries

Ryan Banerjee and Fabrizio Zampolli ()

Economic Modelling, 2019, vol. 82, issue C, 420-436

Abstract: We investigate how the short-term effects of fiscal consolidation on output and employment vary with the state of the business cycle, monetary policy, public debt, the current account, and private credit. By examining the response of a large number of variables, we are also able to shed light on the transmission channels of fiscal policy. Our main finding is that short-term output multipliers are below unity, even in states in which multipliers are expected to be larger (eg when the output gap is negative or monetary policy tight). Key offsetting factors that reduce the size of multipliers and explain differences across states are the extent to which the external sector improves and monetary policy eases.

Keywords: Fiscal consolidation; Fiscal multipliers; Narrative approach; Local projections (search for similar items in EconPapers)
JEL-codes: H60 E62 (search for similar items in EconPapers)
Date: 2019
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Working Paper: What drives the short-run costs of fiscal consolidation? Evidence from OECD countries (2016) Downloads
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DOI: 10.1016/j.econmod.2019.01.023

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