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Total factor productivity (TFP) and fiscal consolidation: how harmful is austerity?

Ioanna Bardaka (), Ioannis Bournakis () and Georgia Kaplanoglou
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Ioanna Bardaka: Bank of Greece
Georgia Kaplanoglou: University of Athens

No 255, Working Papers from Bank of Greece

Abstract: Departing from the expansionary austerity literature, this study assesses empirically whether fiscal consolidation propagates changes in the supply side of the economy that can potentially influence total factor productivity. Using a panel dataset of 26 OECD countries over the period 1980-2016 and employing panel vector autoregressive and error correction model specifications, we present evidence of both short-run and long-run negative effects of fiscal consolidation on TFP. The short-run impact is disproportionately more damaging for the TFP of low debt countries, while, contrary to the expansionary austerity thesis, our empirical results would advise against spending-driven fiscal consolidation, since such consolidation undermines capacity due to the importance of government spending in shaping productive capital. Our results have serious policy implications for the implementation and design of fiscal adjustment programmes.

Keywords: total factor productivity; fiscal consolidation; OECD countries; austerity; growth (search for similar items in EconPapers)
JEL-codes: E62 C23 H68 (search for similar items in EconPapers)
Pages: 42
Date: 2018-12
New Economics Papers: this item is included in nep-eec, nep-eff and nep-mac
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