The Effects of Fiscal Consolidations: Theory and Evidence

Alberto Alesina; Omar Barbiero; Carlo Favero; Francesco Giavazzi; Matteo Paradisi

doi:10.3386/w23385

The Effects of Fiscal Consolidations: Theory and Evidence

Alberto Alesina, Omar Barbiero, Carlo Favero, Francesco Giavazzi & Matteo Paradisi

ID w23385

DOI 10.3386/w23385

Issue Date May 2017

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, with details on over 3500 measures for 16 OECD countries. We show that government spending cuts and cuts in transfers are much less harmful than tax hikes, despite the fact that non-distortionary transfers are not classified as spending. Standard New Keynesian models robustly match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigate the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices.

For comments we thank Edoardo Acabbi, Daniel Cohen, Harald Hulig, and participants in the 2016 ASSA Meetings in San Francisco, at the 2015 ECFIN workshop “Expenditure-based consolidations: experiences and outcomes”, at CEPR’s 2015 ESSIM and at seminars at the NY Fed, the IMF, the University of Stockholm, the University of Chicago, Booth and the Paris School of Economics. We also thank Gualtiero Azzalini, Igor Cerasa, Giorgio Saponaro, Daniele Imperiale, Armando Miano and Lorenzo Rigon for outstanding research assistance. We gratefully acknowledge the support of IGIER at Bocconi University and of the Italian Ministry for Research and Universities through a 2015 PRIN grant prot. 2015FMRE5X. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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- May 3, 2017

The Effects of Fiscal Consolidations: Theory and Evidence

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