The Effects of Fiscal Consolidations: Theory and Evidence
66 Pages Posted: 8 May 2017
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The Effects of Fiscal Consolidations: Theory and Evidence
Date Written: May 2017
Abstract
We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, finding details on over 3500 measures. Government spending and transfer cuts are much less harmful than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigates the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices. This channel explains different sizes of multipliers found in fiscal stimuli compared to consolidation plans.
Keywords: fiscal consolidation plans, Fiscal multipliers
JEL Classification: E62
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