Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects

52 Pages Posted: 15 Feb 2006

See all articles by Alberto F. Alesina

Alberto F. Alesina

Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Roberto Perotti

Bocconi University - Department of Economics; European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR)

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Date Written: July 1996

Abstract

This paper studies how the composition of fiscal adjustments influences their likelihood of "success", defined as a long lasting deficit reduction, and their macroeconomic consequences. We find that fiscal adjustments which rely primarily on spending cuts on transfers and the government wage bill have a better chance of being successful and are expansionary. On the contrary fiscal adjustments which rely primarily on tax increases and cuts in public investment tend not to last and are contractionary. We discuss alterative explanations for these findings by studying both a full sample of OECD countries and by focusing on three case studies: Denmark, Ireland and Italy.

JEL Classification: H1, H5, E62

Suggested Citation

Alesina, Alberto F. and Perotti, Roberto, Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects (July 1996). IMF Working Paper No. 96/70, Available at SSRN: https://ssrn.com/abstract=882968

Alberto F. Alesina (Contact Author)

Harvard University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Roberto Perotti

Bocconi University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

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