Is it the "How" or the "When" that Matters in Fiscal Adjustments?

Alberto Alesina, Gualtiero Azzalini, Carlo Favero, Francesco Giavazzi, Armando Miano

NBER Working Paper No. 22863
Issued in November 2016, Revised in May 2017
NBER Program(s):   IFM

Using data from 16 OECD countries from 1981 to 2014 we specify a model that determines the output effect of fiscal adjustments as a function of the composition of the adjustment and the state of the cycle. We find that both the "how" and the "when" matter, but the heterogeneity related to the composition is more robust across different specifications. Adjustments based upon spending cuts are consistently much less costly than those based upon tax increases. Our results are not explained by different reactions of monetary policy. However, when the domestic central bank can set interest rates - that is outside of a currency union - it appears to be able to dampen the recessionary effects of tax-based consolidations implemented during a recession.

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Document Object Identifier (DOI): 10.3386/w22863

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