Success and Failure of Fiscal Consolidation in the OECD: A Multivariate Analysis

Freddy Heylen and Gerdie Everaert

Public Choice, 2000, vol. 105, issue 1-2, 103-24

Abstract: This paper tests five hypotheses explaining the success and failure of fiscal consolidation in a multivariate regression framework. These hypotheses concern (i) the composition of the consolidation programme, (ii) its size and persistence, (iii) the gravity of the debt situation, (iv) the influence of the international macroeconomic environment and (v) the contribution of a preceding devaluation. To test for composition effects we use cyclically-adjusted data. Although many conclusions of the existing empirical literature are confirmed, some do not survive. A popular hypothesis--that to succeed, consolidation should rely on cutting the government wage bill--is rejected. A new empirical result is that the contribution of a devaluation to the success of fiscal consolidation depends on the composition of the consolidation programme. Copyright 2000 by Kluwer Academic Publishers

Date: 2000
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