The Effects of Fiscal Consolidations: Theory and Evidence

Alberto Alesina, Omar Barbiero, Carlo Favero (), Francesco Giavazzi () and Matteo Paradisi

No 23385, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, with details on over 3500 measures for 16 OECD countries. We show that government spending cuts and cuts in transfers are much less harmful than tax hikes, despite the fact that non-distortionary transfers are not classified as spending. Standard New Keynesian models robustly match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigate the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices.

JEL-codes: E62 H60 (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-mac and nep-pbe
Note: IFM ME
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Citations: View citations in EconPapers (62)

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Working Paper: The effects of Fiscal Consolidations: Theory and Evidence (2017)
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