The Output Effect of Fiscal Consolidations

53 Pages Posted: 16 Aug 2012

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)

Carlo A. Favero

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Francesco Giavazzi

National Bureau of Economic Research (NBER); University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 16, 2012

Abstract

This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions. The difference cannot be explained by different monetary policies during the two types of adjustments. Studying the effects of multi-year fiscal plans rather than individual shifts in fiscal variables we make progress on question of anticipated versus unanticipated policy shifts: we find that the correlation between unanticipated and anticipated shifts in taxes and spending is heterogeneous across countries, suggesting that the degree of persistence of fiscal corrections varies. Estimating the effects of fiscal plans, rather than individual fiscal shocks, we obtain much more precise estimates of tax and spending multipliers.

Keywords: fiscal adjustment, output, confidence, investment

JEL Classification: H60, E62

Suggested Citation

Alesina, Alberto F. and Favero, Carlo A. and Giavazzi, Francesco and Giavazzi, Francesco, The Output Effect of Fiscal Consolidations (August 16, 2012). Available at SSRN: https://ssrn.com/abstract=2130577 or http://dx.doi.org/10.2139/ssrn.2130577

Alberto F. Alesina (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
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United States
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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Carlo A. Favero

Bocconi University - Department of Finance ( email )

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Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Francesco Giavazzi

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3304 (Phone)
+39 02 5836 3302 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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