The Network Effects of Fiscal Adjustments

Carlo Favero (), Edoardo Briganti and Madina Karamysheva

No 13017, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A large and increasing body of empirical evidence has established that fiscal adjustments based on government spending cuts are less costly in terms of losses in output growth than those based on tax increases. We show that the propagation of fiscal adjustment plans through the industrial network can in theory explain this evidence and that it does so in practice for the US economy. The heterogenous effects of tax-based and expenditure-based adjustments might depend on the difference in their propagation channels in the network of industries. A tax-based adjustment plan is mainly a supply shock which propagates downstream (from supplier industries to customer industries) while an expenditure based plan is a demand shock which propagates upstream (from customer industries to supplier industries). Empirical investigation of these channels on US data based on Spatial Vector Autoregressions reveals that tax based plans propagate through the network with an average output multiplier of close to -2, while the propagation of expenditure based plans does not lead to any statistically significant effect on growth.

Keywords: Industrial networks; Fiscal adjustment plans; Output growth (search for similar items in EconPapers)
JEL-codes: E60 E62 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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