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Title: The Network Effects of Fiscal Adjustments

Author(s): Edoardo Briganti, Carlo A. Favero and Madina Karamysheva

Publication Date: June 2018

Keyword(s): fiscal adjustment plans, industrial networks and output growth

Programme Area(s): International Macroeconomics and Finance

Abstract: A large and increasing body of empirical evidence has established that fiscal adjustments based on government spending cuts are less costly in terms of losses in output growth than those based on tax increases. We show that the propagation of fiscal adjustment plans through the industrial network can in theory explain this evidence and that it does so in practice for the US economy. The heterogenous effects of tax-based and expenditure-based adjustments might depend on the difference in their propagation channels in the network of industries. A tax-based adjustment plan is mainly a supply shock which propagates downstream (from supplier industries to customer industries) while an expenditure based plan is a demand shock which propagates upstream (from customer industries to supplier industries). Empirical investigation of these channels on US data based on Spatial Vector Autoregressions reveals that tax based plans propagate through the network with an average output multiplier of close to -2, while the propagation of expenditure based plans does not lead to any statistically significant effect on growth.

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Bibliographic Reference

Briganti, E, Favero, C and Karamysheva, M. 2018. 'The Network Effects of Fiscal Adjustments'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13017