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Is it the “How” or the “When” that Matters in Fiscal Adjustments?

Alberto Alesina (), Gualtiero Azzalini (), Carlo Favero (), Francesco Giavazzi () and Armando Miano ()
Additional contact information
Alberto Alesina: Harvard University
Gualtiero Azzalini: Bocconi University
Francesco Giavazzi: IGIER Bocconi
Armando Miano: Harvard University

IMF Economic Review, 2018, vol. 66, issue 1, 144-188

Abstract: Abstract Using data from 16 OECD countries from 1981 to 2014 we study the effects on output of fiscal adjustments as a function of the composition of the adjustment—that is, whether the adjustment is mostly based on spending cuts or on tax hikes—and of the state of the business cycle when the adjustment is implemented. We find that both the “how” and the “when” matter, but the heterogeneity related to the composition is more robust across different specifications. Adjustments based upon permanent spending cuts are consistently much less costly than those based upon permanent tax increases. Our results are generally not explained by different reactions of monetary policy. However, when the domestic central bank can set interest rates—that is outside of a currency union—it appears to be able to dampen the recessionary effects of consolidations implemented during a recession.

JEL-codes: E62 H60 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Is it the "How" or the "When" that Matters in Fiscal Adjustments? (2016) Downloads
Working Paper: Is it the "How" or the "When" that Matters in Fiscal Adjustments? (2016) Downloads
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