DP12016 The effects of Fiscal Consolidations: Theory and Evidence
|Author(s):||Alberto F Alesina, Omar Barbiero, Carlo A. Favero, Francesco Giavazzi, Matteo Paradisi|
|Publication Date:||May 2017|
|Keyword(s):||fiscal consolidation plans, Fiscal multipliers|
|Programme Areas:||International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12016|
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.