The Network Effects of Fiscal Adjustments

35 Pages Posted: 3 Jul 2018

See all articles by Edoardo Briganti

Edoardo Briganti

Bocconi University

Carlo A. Favero

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Madina Karamysheva

National Research University Higher School of Economics

Date Written: June 2018

Abstract

A large and increasing body of empirical evidence has established that fiscal adjustments based on government spending cuts are less costly in terms of losses in output growth than those based on tax increases. We show that the propagation of fiscal adjustment plans through the industrial network can in theory explain this evidence and that it does so in practice for the US economy. The heterogenous effects of tax-based and expenditure-based adjustments might depend on the difference in their propagation channels in the network of industries. A tax-based adjustment plan is mainly a supply shock which propagates downstream (from supplier industries to customer industries) while an expenditure based plan is a demand shock which propagates upstream (from customer industries to supplier industries). Empirical investigation of these channels on US data based on Spatial Vector Autoregressions reveals that tax based plans propagate through the network with an average output multiplier of close to -2, while the propagation of expenditure based plans does not lead to any statistically significant effect on growth.

Keywords: fiscal adjustment plans, industrial networks, output growth

JEL Classification: E60, E62

Suggested Citation

Briganti, Edoardo and Favero, Carlo A. and Karamysheva, Madina, The Network Effects of Fiscal Adjustments (June 2018). CEPR Discussion Paper No. DP13017, Available at SSRN: https://ssrn.com/abstract=3206782

Edoardo Briganti (Contact Author)

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Carlo A. Favero

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Madina Karamysheva

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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