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Title: The effects of Fiscal Consolidations: Theory and Evidence

Author(s): Alberto F Alesina, Omar Barbiero, Carlo A. Favero, Francesco Giavazzi and Matteo Paradisi

Publication Date: May 2017

Keyword(s): fiscal consolidation plans and Fiscal multipliers

Programme Area(s): International Macroeconomics and Finance

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, finding details on over 3500 measures. Government spending and transfer cuts are much less harmful than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigates the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices. This channel explains different sizes of multipliers found in fiscal stimuli compared to consolidation plans.

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Bibliographic Reference

Alesina, A, Barbiero, O, Favero, C, Giavazzi, F and Paradisi, M. 2017. 'The effects of Fiscal Consolidations: Theory and Evidence'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12016