Fiscal Adjustments: Determinants and Macroeconomic Consequences

Abstract:     
Manmohan S. Kumar, Daniel Leigh and Alexander Plekhanov analyze the determinants of fiscal consolidation success in OECD economies as well as the short-run and long-run effects of fiscal adjustments on economic activity. They examine fourteen case studies, panel data for OECD economies, and the results of simulations using a non-Ricardian multi-country dynamic general equilibrium model. They find that while fiscal consolidations tend to have short-run contractionary effects, they can be expansionary in the long run, provided that they do not rely excessively on cuts in productive government expenditure. They can also create positive spillover effects for the rest of the world.

Number of Pages in PDF File: 36

working papers series