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Is fiscal consolidation self-defeating? A panel-VAR analysis for the Euro area countries

Maria Grazia Attinasi and Luca Metelli ()

Journal of International Money and Finance, 2017, vol. 74, issue C, 147-164

Abstract: This paper studies the effects of fiscal consolidation on the debt-to-GDP ratio of 11 Euro area countries over the period 2000Q1-2012Q1. Using a quarterly Panel VAR allows us to trace out the dynamics of the debt-to-GDP ratio following a fiscal shock and to disentangle the main channels through which fiscal consolidation affects the debt ratio. We define a fiscal consolidation episode as self-defeating if the level of the debt-to-GDP ratio does not decrease compared to the pre-shock level. Our main finding is that when consolidation is implemented via a cut in government primary spending, the debt ratio, after an initial increase, falls to below its pre-shock level. When instead the consolidation is implemented via an increase in government revenues, the initial increase in the debt ratio is stronger and, eventually, the debt ratio reverts to its pre-shock level, resulting in what we call self-defeating consolidation.

Keywords: Fiscal consolidation; Debt trajectory; Panel VAR; Fiscal stress (search for similar items in EconPapers)
JEL-codes: E62 H6 C33 (search for similar items in EconPapers)
Date: 2017
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