An Assessment of Cross-Country Fiscal Consolidation

Bruno Carrasco () and Seung Mo Choi
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Bruno Carrasco: Asian Development Bank

No 79, ADB Economics Working Paper Series from Asian Development Bank

Abstract: This paper finds that initial conditions, composition, and timing of adjustment matter for successful fiscal adjustment (SFA). First, countries with higher primary deficits and larger government debts are more likely to pursue SFA. Second, in mature economies, SFA is driven by expenditure compression measures (largely cutbacks in subsidies) rather than by revenue augmentation measures. On the other hand, in emerging market economies, while expenditure compression measures (in particular, a decrease in capital expenditure) drive SFA, revenue augmentation measures also play an important role. Third, synchronizing fiscal adjustment to an expansionary phase of the business cycle increases the likelihood of its success. A probit analysis tends to support these findings. Finally, the paper reviews whether fiscal adjustment can indeed be expansionary. The findings point to a weak inclination toward noncontractionary outcomes, although further research is required to explain what drives this non-Keynesian result.

Keywords: fiscal adjustment; initial conditions; composition; timing; mature economies; emerging market economies (search for similar items in EconPapers)
JEL-codes: H30 H50 H60 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2006-02-01
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