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Revenue- versus spending-based consolidation plans: the role of follow-up

Roel Beetsma, Oana Furtuna and Massimo Giuliodori

No 2178, Working Paper Series from European Central Bank

Abstract: The literature on fiscal multipliers finds that spending-based fiscal consolidations tend to have more benign macro-economic consequences than revenue-based consolidations. By directly comparing expost data with consolidation plans, we present evidence of a systematically weaker follow-up of spending-based consolidation plans. Next, using a newly-developed dataset of consolidation announcements, panel VAR regressions confirm the weaker follow-up of spending-based plans and their more benign macro-economic effects compared to those of revenue-based plans. We disentangle the role of the difference in follow-up from that of the difference in the composition of revenue- and spending-based consolidations. While the latter channel, which works through the difference between revenue and spending multipliers, explains the largest fraction of the difference in economic trajectories, the difference in follow-up plays a non-negligible role as well. JEL Classification: E21, E62, H5

Keywords: fiscal consolidation announcements; fiscal multipliers; follow-up; narrative identification; panel vector auto-regression (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-ure
Date: 2018-09
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