Τhe short-run effects of fiscal adjustment in OECD countries

Abstract

This paper investigates the short-run effects of fiscal adjustment shocks on macroeconomic aggregates in a group of 24 OECD economies from 1990 to 2019. The analysis controls for recession and expansions, high and low public debt ratio, tight and loose monetary conditions, and trade openness. We find no evidence of expansionary fiscal consolidations or non-Keynesian effects. The empirical findings suggest that unanticipated fiscal consolidation shocks lead to lower real GDP, private consumption, investment, and inflation and to higher unemployment rate. The effects are more pronounced in bad economic times, high debt countries, closed economies and when monetary conditions are tight. Consequently, in these cases, the decline of the public debt ratio is more subdued.

Keywords: Fiscal consolidation, public debt, bad and good times, monetary conditions, openness

JEL Classification: H60, E62,E32