(Non-)Keynesian Effects of Fiscal Austerity: New Evidence from a Large Sample

REM Working Paper 0158-2021

42 Pages Posted: 18 Feb 2021

See all articles by António Afonso

António Afonso

ISEG Lisbon School of Economics and Management,Universidade de Lisboa; UECE (Research Unit on Complexity and Economics); REM - Research in Economics and Mathematics

José Alves

University of Lisbon; ISEG Lisbon School of Economics and Management,Universidade de Lisboa; REM - Resarch in Economics and Mathematics

João Tovar Jalles

University of Lisbon; International Monetary Fund (IMF); Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Date Written: January 7, 2021

Abstract

We empirically assess whether a usually expected negative response of private consumption and private investment to a fiscal consolidation is reversed. We focus on a large sample of 174 countries between 1970 and 2018. We also employ three alternative measures of the Cyclically Adjusted Primary Balance used to determine fiscal episodes: i) the IMF-WEO based; ii) the HP-based; and iii) the Hamilton (2018)-based. We find that: i) increases in government consumption have a Keynesian effect on real per capita private consumption; ii) there is a positive effect of tax increases on private consumption when there is a fiscal consolidation; iii) there is a crowding-in effect for private investment, from fiscal contractions. Moreover, expansionary fiscal consolidations occur particularly in highly indebted advanced economies following an increase in taxes. Finally, the negative effect of taxation on private consumption is larger when an economy is experiencing a financial crisis but it is not consolidating.

Keywords: non-Keynesian effects, fiscal consolidation, filtering, consumption, investment, financial crises, panel data, endogeneity

JEL Classification: C23, E21, E62, H5, H62

Suggested Citation

Afonso, António and Alves, José and Jalles, João Tovar, (Non-)Keynesian Effects of Fiscal Austerity: New Evidence from a Large Sample (January 7, 2021). REM Working Paper 0158-2021, Available at SSRN: https://ssrn.com/abstract=3761941 or http://dx.doi.org/10.2139/ssrn.3761941

António Afonso (Contact Author)

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

HOME PAGE: http://https://www.iseg.ulisboa.pt/

UECE (Research Unit on Complexity and Economics) ( email )

Rua Miguel Lupi 20
Lisbon, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://uece.rc.iseg.ulisboa.pt/

REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://rem.rc.iseg.ulisboa.pt/

José Alves

University of Lisbon ( email )

R. Branca Edmée Marques
Dept. Plant Biology
Lisboa, 1600-276
Portugal

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

REM - Resarch in Economics and Mathematics ( email )

ISEG Universidade de Lisboa
Rua Miguel Lupi 20
Lisboa, 1249-078
Portugal

João Tovar Jalles

University of Lisbon ( email )

R. Branca Edmée Marques
Dept. Plant Biology
Lisboa, 1600-276
Portugal

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Technical University of Lisbon (UTL) - Research Unit on Complexity and Economics (UECE)

Rua Miguel Lupi, 20
Lisboa, 1200-781
Portugal

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