How Do Fiscal Adjustments Work? An Empirical Investigation

69 Pages Posted: 10 Jan 2020

See all articles by Madina Karamysheva

Madina Karamysheva

National Research University Higher School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2019

Abstract

Recent empirical evidence suggests that fiscal consolidation mainly based on tax hikes has a more recessionary impact on economic growth than those based on expenditure cuts. This paper evaluates the effects of fiscal adjustment plans identified through the narrative approach on macroeconomic activity. I incorporate fiscal plans into the vector autoregression model to investigate transmission channels of fiscal consolidation and accompanying policy. I check whether monetary policy, uncertainty, or financial markets can explain the heterogeneous effects of fiscal adjustment plans. I find that the financial market and macro uncertainty are the most important, explaining about 90% of the total difference.

Keywords: fiscal adjustment plans, output, risk, financial market, uncertainty, monetary policy

JEL Classification: E60, E62

Suggested Citation

Karamysheva, Madina, How Do Fiscal Adjustments Work? An Empirical Investigation (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=3512027 or http://dx.doi.org/10.2139/ssrn.3512027

Madina Karamysheva (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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