The design of fiscal adjustments
This paper offers three results. First, in line with the previous literature, we confirm that fiscal adjustments based mostly on the spending side are less likely to be reversed. Second, spending based fiscal adjustments have caused smaller recessions than tax based fiscal adjustments. Finally, certain combinations of policies have made it possible for spending based fiscal adjustments to be associated with growth in the economy even on impact rather than with a recession. Thus, expansionary fiscal adjustments are possible.
We thank Jeff Brown, Carlo Favero, Francesco Giavazzi, Paulo Mauro and participants to the 2012 AER session on Fiscal Adjustments for useful comments and Giampaolo Lecce for excellent research assistantship. Views and conclusions expressed in this paper are those of the author and do not necessarily represent those of Goldman Sachs or the National Bureau of Economic Research. The author alone is responsible for any remaining errors.