The Economic Effects of Fiscal Consolidation with Debt Feedback
52 Pages Posted: 21 Jun 2013
Date Written: May 2013
The past several years of recession and slow recovery have raised much interest on the effect of fiscal stimulus on economic activity, even as high public debts in many countries would call for fiscal consolidation. To evaluate the delicate balance between stimulus and consolidation requires measuring the size of fiscal multipliers, which often depends on having quarterly data so that exogenous fiscal policy shocks can be identified. We estimate fiscal multipliers using a novel methodology for identifying fiscal shocks within a structural vector autoregressive approach using annual data while controling for debt feedback effects. The estimation focuses on regions with scarce quarterly data (mostly low-income countries), and uses results for advanced economies, emerging market countries, and other broad groupings for which alternative estimates are available to validate the methodology. Differently from advanced and emerging market economies, fiscal consolidation in low-income countries has only a small temporary negative effect on growth while raising medium-term output. Shifting the composition of public spending toward capital expenditure further supports long-run growth.
Keywords: Fiscal consolidation, Central America, Fiscal policy, Public debt, Cross country analysis, fiscal policy, Identification, Fiscal mulpiliers, Consolidation, SVECM, fiscal consolidation, fiscal multipliers, tax revenue, government spending, fiscal stimulus, capital expenditure, fiscal shocks, tax collection, spending cuts, public debt, discretionary fiscal policy, tax rates, tax base, cyclical fiscal policy, tax revenues, fiscal multiplier, expenditure cuts, budget constraint, fiscal data, fiscal variables, tax increases, public spending, government budget, fiscal policy responses, taxation, tax changes, fiscal outcomes, tax administration, fiscal outcome, public expenditures, fiscal accounts,
JEL Classification: E60, E62, H30
Suggested Citation: Suggested Citation