The literature on fiscal multipliers is far from reaching an agreed upon conclusion about their size and how they might be state contingent. There is so much debate about this issue that Eric Leeper (2010) defined this literature as “alchemy.” One result, however, seems very robust: in OECD economies fiscal consolidations (austerity) based upon expenditure cuts are much less costly than those performed on the tax side. The purpose of this paper is two-fold. First, we review more recent evidence based upon an extension of the narrative method which considers multi-year fiscal plans rather than year-by-year shifts in fiscal variables, likein Romer and Romer (2010) and Guajardo, Leigh, and Pescatori (2014). We shall also document cases of “expansionary austerity,” namely episodes in which even large reductions of government spending were associated on impact with increases in GDP growth first recorded by Giavazzi and Pagano (1990). Second, we illustrate alternative theoretical explanations for our findings about spending versus tax-based consolidations.
What do we know about the effects of austerity ?
Alesina, AlbertoMembro del Collaboration Group
;Favero, CarloMembro del Collaboration Group
;Giavazzi. FrancescoMembro del Collaboration Group
2018
Abstract
The literature on fiscal multipliers is far from reaching an agreed upon conclusion about their size and how they might be state contingent. There is so much debate about this issue that Eric Leeper (2010) defined this literature as “alchemy.” One result, however, seems very robust: in OECD economies fiscal consolidations (austerity) based upon expenditure cuts are much less costly than those performed on the tax side. The purpose of this paper is two-fold. First, we review more recent evidence based upon an extension of the narrative method which considers multi-year fiscal plans rather than year-by-year shifts in fiscal variables, likein Romer and Romer (2010) and Guajardo, Leigh, and Pescatori (2014). We shall also document cases of “expansionary austerity,” namely episodes in which even large reductions of government spending were associated on impact with increases in GDP growth first recorded by Giavazzi and Pagano (1990). Second, we illustrate alternative theoretical explanations for our findings about spending versus tax-based consolidations.File | Dimensione | Formato | |
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