The Network Effects of Fiscal Adjustments
64 Pages Posted: 28 Nov 2021
Date Written: June 21, 2021
We study the effects of fiscal consolidations in the United States and their propagation in the production network. We use a narrative approach to identify fiscal adjustments which are exogenous to output fluctuations. Then we apply spatial econometric techniques to separate the total effect of fiscal adjustments into a direct and network component. We find that fiscal adjustments based on increased taxation are more recessionary than those based on spending cuts. Moreover, one-quarter of the difference in their total output effect is explained by the stronger network propagation of taxes relative to government spending.
Keywords: industrial networks, fiscal adjustment plans, output growth, applied spatial econometrics
JEL Classification: E60, E62
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