The output effect of fiscal consolidation plans

Alberto Alesina, Carlo Favero () and Francesco Giavazzi

No 76, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We show that the correct experiment to evaluate the effects of a fiscal adjustment is the simulation of a multi year fiscal plan rather than of individual fiscal shocks. Simulation of fiscal plans adopted by 16 OECD countries over a 30-year period supports the hypothesis that the effects of consolidations depend on their design. Fiscal adjustments based upon spending cuts are much less costly, in terms of output losses, than tax-based ones and have especially low output costs when they consist of permanent rather than stop and go changes in taxes and spending. The difference between tax-based and spending-based adjustments appears not to be explained by accompanying policies, including monetary policy. It is mainly due to the different response of business confidence and private investment.

Keywords: confidence; fiscal adjustment; investment (search for similar items in EconPapers)
JEL-codes: E62 H60 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: The output effect of fiscal consolidation plans (2015)
Chapter: The Output Effect of Fiscal Consolidation Plans (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:76

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