Department of Economics
Cambridge, MA 02138
NBER Working Papers and Publications
|November 2016||Is it the "How" or the "When" that Matters in Fiscal Adjustments?|
with Alberto Alesina, Gualtiero Azzalini, Carlo Favero, Francesco Giavazzi: w22863
Using data from 16 OECD countries from 1981 to 2014 we study the effects on output of fiscal adjustments as a function of the composition of the adjustment – that is, whether the adjustment is mostly based on spending cuts or on tax hikes – and of the state of the business cycle when the adjustment is implemented. 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 permanent spending cuts are consistently much less costly than those based upon permanent tax increases. Our results are generally 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 ...