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

Ryan Banerjee and Fabrizio Zampolli ()

No 553, BIS Working Papers from Bank for International Settlements

Abstract: In a panel of OECD countries, we investigate the short-term effects of fiscal consolidation on output and employment, and how these vary with the state of the business cycle, monetary policy, the level of public debt, the current account, and the strength of the financial cycle. The estimation makes use of local projection methods and fiscal consolidation shocks identified through the narrative approach. Our main finding is that short-term fiscal multipliers remain for the most part below unity, even in bad states, suggesting that important offsetting factors were at play in past consolidation episodes. In particular, we do not find evidence that fiscal multipliers are above unity when the output gap is negative or monetary policy is tight. Instead, we find evidence of lower than average multipliers when the current account is in deficit and public debt is high (although in the latter case employment costs tend to be larger). One factor found to raise the costs of fiscal consolidation is weak private credit growth. Even in this case, however, point estimates indicate that fiscal multipliers are not larger than one. Our results suggest that fiscal consolidation multipliers are not necessarily, or everywhere, larger than average in the aftermath of the global financial crisis.

Keywords: fiscal consolidation; fiscal multipliers; narrative approach; panel data; local projections (search for similar items in EconPapers)
Pages: 36 pages
Date: 2016-03
New Economics Papers: this item is included in nep-mac and nep-pbe
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Journal Article: What drives the short-run costs of fiscal consolidation? Evidence from OECD countries (2019) Downloads
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