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### 2.1 Macroeconomic effects of fiscal consolidation — literature and measurement
- Literature overview:
  - Hellwig and Neumann (1987): fiscal consolidation can generate two opposing effects.
  - Giavazzi and Pagano (1990, 1995), Alesina and Roberti (1995, 1997) and Alesina and Ardagna (2010): evidence that the short-run fiscal multiplier can be negative.
  - Alesina and Ardagna (2010): use OECD data 1970-2007 to analyze historical large fiscal policy stances (stimuli and consolidations).
  - Romer and Romer (2010): advocate the narrative approach to address endogeneity in tax-change measurement.
  - Guajardo et al. (2014): narrative approach shows empirical fiscal multiplier estimates can contrast sharply by measurement method.
  - Alesina et al. (2017): extend Devries et al. (2011) dataset to include fiscal plans for 16 OECD countries, 1978-2014, including consolidations 2009–2014.
- Measurement approach and data:
  - Narrative approach: review historical policy documents to identify policy changes motivated to reduce the budget deficit for long-term public financial sustainability.
  - Alesina et al. (2017) classify policy prescriptions into categories including: personal income direct taxes, corporate direct taxes, individual property taxes, corporate property taxes, taxes on goods and services, government consumption, public investments, public employees salaries, firm subsidies, R&D policies, corporate tax credits and deductions, individual tax credits and deductions, family and children policies, pension-related expenditure, unemployment benefits, health-related expenditures and other social security expenditures.
  - Fiscal shocks identified from contemporaneous documents, distinguished between unanticipated measures and announcements of future measures up to a five year horizon, and scaled as a percentage of GDP in the year before the policy announcement.
- Empirical finding on instruments and output:
  - Alesina et al. (2017): estimate multipliers for taxes, government consumption and investment, and transfers.
  - Main empirical conclusion reported: fiscal consolidations that rely mainly on raising taxes tend to be associated with larger output losses since tax hikes have distortionary effects and tend to increase persistence.
  - Measurement choice matters: Guajardo et al. (2014) and others show measurement method can yield negative or positive fiscal multiplier estimates.

### 4.2 Heterogeneity and the role of macroeconomic policies — interactions and mechanisms
- Objectives and interaction variables:
  - Explore heterogeneous effects of fiscal policy shocks on firm-level total factor productivity (TFP) across macroeconomic environments.
  - Interaction variables: rule of law, exchange rate, credit to the private sector (percent of GDP), aggregate financial development (Fin_ct), globalization (KOF index).
- Rule of law:
  - Better rule of law increases firm-level productivity: 0.075∗∗∗.
  - Interaction: fiscal consolidation's negative effect on firm-level TFP is dampened where rule of law is strong: interactive coefficient 0.005∗∗∗ (Table 5, column (1)).
- Exchange rate:
  - Increase denotes appreciation. When fiscal consolidation is accompanied by appreciation, the negative effect on TFP is reinforced (magnified), plausibly via strain on exporters and reduced investment.
- Financial development (credit to private sector as percent of GDP):
  - More developed financial sector is beneficial for firm-level productivity.
  - Interaction between this credit measure and fiscal consolidation shows no impact on TFP in the reported results (Table 5, column (3)).
- Aggregate financial development and globalization:
  - Financial development index (Svirydzenka (2016)): higher Fin_ct mitigates the detrimental effect of fiscal consolidation on firm-level productivity (positive interactive term; Table 10 and Tables 11–12).
  - Sub-indexes (financial institutions development and financial markets development) show qualitatively similar mitigation.
  - Caveat: sample comprises developed countries; results likely capture lower bounds.
  - Globalization (KOF index, scale 0–100): baseline shows firms in more integrated economies have lower productivity on average (Table 13), but interaction: in more globalized economies experiencing fiscal consolidation, firm-level productivity is less harmed by consolidation (Table 13, columns (1) and (5)). De jure and de facto globalization measures yield qualitatively similar results (Tables 14–15).
- Nature and intensity of fiscal consolidation:
  - Intensity definition: dummy = 1 if consolidation magnitude > mean magnitude for that country; 0 otherwise.
  - Very high episodes are very detrimental to firm-level productivity (Table 16, columns (1) and (5)); high consolidation partly through spending cuts has significant negative effect.
  - Low/moderate consolidation episodes do not negatively impact firm-level productivity (Table 17): moderate consolidation allows adjustment and diversification.
  - Policy implication: avoid very aggressive consolidation measures where possible.
- Composition (tax-based vs spending-based):
  - Tax-based episode: ratio of tax hikes to GDP > ratio of spending cuts to GDP in that period.
  - Tax-based consolidation is negatively related to firm-level productivity (Table 18); both tax hikes and spending cuts during tax-based episodes are detrimental (Table 18, columns (2)–(4) and (6)–(8)).
  - Spending-based consolidation lessens harm to firm-level productivity in this sample of developed countries (Table 19); interpretation: developed countries’ robust public infrastructure means some spending cuts may not severely constrain production capacity.
- Dynamic medium-term response (local projections, Jordà (2005)):
  - Immediate (impact) effect of fiscal consolidation on firm-level productivity is negative (Figure 2).
  - Medium term: productivity quickly recovers (Figure 2; similar results for tax hikes and spending cuts in Figure 3).
  - Possible explanations: firm-level reallocation and adjustment; short-run surprises cause sub-optimal input combinations later corrected.
- Granular instruments — taxes and spending:
  - Tax categories (direct, indirect, NYC, other): both direct and indirect tax hikes have negative and significant effects on firm-level productivity (Table 6, columns (1)–(2)).
  - Spending categories (public investment, government consumption, transfers, NYC, other): cuts in government consumption, public investment, and “other spending” have negative and significant impacts on firm-level productivity (Table 6, columns (5) and (8)).
  - Rationale: taxes introduce distortions (Liu (2011); Hsieh and Klenow (2009)); public investment supports production capacity—cuts hinder efficiency.
  - NYC categories are heterogeneous and less interpretable.

### 4.7 Robustness checks — alternative specifications and mechanisms
- Inclusion of time fixed effects (Table 7):
  - lntotalcon: -0.019 ∗∗∗ (column (1), (0.001)); -0.015 ∗∗∗ (column (2), (0.001)).
  - lntax: -0.019 ∗∗∗ (column (2), (0.001)); -0.021 ∗∗∗ (column (4), (0.001)); -0.013 ∗∗∗ (column (6), (0.001)); -0.015 ∗∗∗ (column (8), (0.001)).
  - lnspend: -0.010 ∗∗∗ (column (3), (0.001)); -0.013 ∗∗∗ (column (4), (0.001)); -0.007 ∗∗∗ (column (7), (0.001)); -0.010 ∗∗∗ (column (8), (0.001)).
  - Controls: Country Fixed Effects, Year Fixed Effects, Country-Time Trend, private credit, regulatory quality, research expenditure.
  - Interpretation: qualitative similarity to baseline—fiscal consolidation, tax hikes, and spending cuts negatively related to firm-level TFP after time FE inclusion.
- Alternative TFP measure (Table 8):
  - Using cost of materials as variable input:
    - lntotalcon: -0.002 ∗∗∗ (columns (1) and (2), (0.000)).
    - lntax: -0.004 ∗∗∗ (columns (2) and (4), (0.001)); -0.003 ∗∗∗ (columns (6) and (8), (0.001)).
    - lnspend: -0.002 ∗∗∗ (column (3), (0.001)); some lnspend coefficients not significant (e.g., -0.000).
  - Interpretation: negative relationships persist; not crucially dependent on TFP construction.
- Labor productivity as mechanism (Table 9):
  - lntotalcon: -0.004 ∗∗∗ (column (1), (0.001)); -0.009 ∗∗∗ (column (2), (0.001)).
  - lntax: 0.067 ∗∗∗ (column (2), (0.001)); 0.087 ∗∗∗ (column (4), (0.001)); 0.012 ∗∗∗ (columns (6) and (8), (0.001)).
  - lnspend: -0.005 ∗∗∗ (column (3), (0.001)); -0.044 ∗∗∗ (column (4), (0.001)); 0.005 ∗∗∗ (column (5), (0.001)).
  - Controls: GDP growth, inflation, trade and firm controls; R2 up to 0.64 in some specifications.
  - Interpretation: total consolidation negatively related to labor productivity; spending cuts negatively related to labor productivity; tax hikes associated with positive labor productivity effects in these specifications—possible temporary firm adjustments.
- Firm size heterogeneity (Table 20):
  - lntotalcon: -0.014 ∗∗∗ (column (1), (0.001)).
  - lntotalcon × firm size: 0.005 ∗∗∗ (column (2), (0.000)).
  - lntax: -0.024 ∗∗∗ (columns (3)-(4), (0.001)/(0.002)); lntax × firm size: 0.007 ∗∗∗ (columns (3)-(4), (0.000)/(0.001)).
  - lnspend: -0.014 ∗∗∗ (column (3), (0.001)); lnspend × firm size: 0.005 ∗∗∗ (column (3), (0.000)).
  - Other: lncap -0.014 ∗∗∗; lnassets 0.060 ∗∗∗; firm size (main) -0.076 ∗∗∗.
  - Interpretation: larger firms better able to adjust; overall impact negative for firms with employment below the 65th percentile.
- Additional robustness highlights:
  - Firm fixed effects included: qualitative similarity to baseline.
  - Control for country debt levels: consistent with baseline.
  - Asymmetric effects: consolidation during recessions particularly detrimental relative to booms (output gap-based distinction).
  - Interaction regularities reported across Tables 5, 6, 10–19: negative baseline coefficients on consolidation; positive interaction terms with financial development and market depth (e.g., lntotalcon × FD: 0.096 ∗∗∗ (Table 10, column (1), (0.007)); lntotalcon × FM: 0.042 ∗∗∗ (Table 12, column (1), (0.004)); lntotalcon × KOFGI: 0.004 ∗∗∗ (Table 13, column (1), (0.000))). High-consolidation interactions often amplify negative effects (e.g., highcon × lntotalcon: -0.005 ∗∗∗ (Table 16, columns (1)-(2), (0.001))).
- Aggregate empirical regularities:
  - Fiscal consolidation is associated with negative effects on firm-level TFP across specifications.
  - Tax hikes commonly show stronger negative coefficients on TFP than spending cuts, although labor productivity results indicate tax hikes can have short-term positive effects on labor productivity.
  - Larger firms mitigate negative impacts; interactions with firm size are positive and significant.
  - Financial development, financial institutions development, financial markets development, and globalization measures tend to attenuate negative consolidation impacts when interactions are included.

### Policy implications and recommendations
- When undertaking fiscal consolidation, especially with high government debt and weakening productive sectors:
  - Employ a focused policy mix that assesses feasibility and preserves or increases productive capacity.
  - Avoid taxes that distort efficient use of factors of production.
  - Target reductions in non-priority government expenditure rather than across-the-board cuts.
  - Very aggressive tax hikes as the main consolidation tool are particularly harmful to firm-level productivity and growth.
  - Prefer a phased consolidation approach over the medium to long term to allow firms to adjust and reduce negative impacts.

*Source: wpiea2022126-print-pdf - 2.1; 4.2; 4.7 (Fiscal Consolidation and Firm Level Productivity: Evidence from Advanced Economies Working Paper No. WP/22/126)*

### 2.1    Macroeconomic effects of fiscal consolidation

### 2.1    Macroeconomic effects of fiscal consolidation

### Literature overview
- Hellwig and Neumann (1987) note fiscal consolidation can generate two effects that work in opposite directions.
- Giavazzi and Pagano (1990, 1995), Alesina and Roberti (1995, 1997) and Alesina and Ardagna (2010) supplied evidence that the short-run fiscal multiplier can be negative.
- Using OECD data for the period 1970-2007, Alesina and Ardagna (2010) analyze historical episodes of large stances of fiscal policy (including both fiscal stimuli episodes and fiscal consolidation ones).
- Romer and Romer (2010) advocate the narrative approach to address endogeneity in conventional measures of tax changes.
- Guajardo et al. (2014) adopt the narrative approach and find that empirical estimates of the fiscal multiplier can yield strikingly contrasting results depending on measurement methods.
- Alesina et al. (2017) build on the narrative approach of Romer and Romer (2010) and extend the Devries et al. (2011) dataset to include all fiscal plans for 16 OECD countries over the period 1978-2014, including consolidations between 2009 and 2014.

### Measurement approach and data
- The narrative approach reviews historical policy documents to identify policy changes motivated by the objective of reducing the budget deficit to ensure long-term public financial sustainability.
- Alesina et al. (2017) classify policy prescriptions into categories including: personal income direct taxes, corporate direct taxes, individual property taxes, corporate property taxes, taxes on goods and services, government consumption, public investments, public employees salaries, firm subsidies, R&D policies, corporate tax credits and deductions, individual tax credits and deductions, family and children policies, pension-related expenditure, unemployment benefits, health-related expenditures and other social security expenditures.
- Fiscal shocks are identified from contemporaneous documents, distinguished between unanticipated measures and announcements of future measures up to a five year horizon, and scaled as a percentage of GDP in the year before the policy announcement to avoid contemporaneous effects.

### Empirical findings on instruments and output
- Alesina et al. (2017) estimate multipliers for taxes, government consumption and investment, and transfers.
- Main empirical conclusion reported: fiscal consolidations that rely mainly on raising taxes tend to be associated with larger output losses since tax hikes have distortionary effects and tend to increase persistence.
- Guajardo et al. (2014) and other studies demonstrate that choice of measurement method can yield contrasting empirical estimates of the fiscal multiplier (negative or positive).

### Additional relevant studies
- Other important studies addressing fiscal consolidation effects across aspects and regions include: Ball et al. (2013), Chen et al. (2019), Carriere-Swallow et al. (2018), Diniz (2018), Leigh et al. (2010) and Forni et al. (2010).

*Source: wpiea2022126-print-pdf - 2.1    Macroeconomic effects of fiscal consolidation (https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022126-print-pdf.pdf)*

### 4.2    Heterogeneity and the role of macroeconomic policies

### 4.2    Heterogeneity and the role of macroeconomic policies

### Interactions between fiscal consolidation and institutional, exchange rate, and financial environments
- Purpose: explore heterogeneous effects of fiscal policy shocks on firm-level total factor productivity (TFP) across different macroeconomic environments.
- Interaction variables examined: rule of law, exchange rate, credit to the private sector (as percent of GDP).
- Rule of law (Table 5, column (1)):
  - Better rule of law increases firm-level productivity: 0.075∗∗∗.
  - Interaction term indicates fiscal consolidation's negative effect on firm-level TFP is dampened where rule of law is strong: interactive coefficient 0.005∗∗∗ (Column 1).
- Exchange rate (Table 5, column (2)):
  - An increase in the exchange rate represents an appreciation of the local currency.
  - When fiscal consolidation is accompanied by appreciation, the negative effect on TFP is reinforced (magnified), plausibly because appreciation strains exporters and, combined with consolidation-induced distortions, reduces investment and TFP.
- Financial development proxied by credit to the private sector (Table 5, column (3)):
  - A more developed financial sector (credit to private sector as percent of GDP) is beneficial for firm-level productivity.
  - However, the interaction between this measure of financial development and fiscal consolidation shows no impact on TFP in these results.

*Note: research on exchange rate effects on firm-level productivity is inconclusive; an increase denotes appreciation in this analysis.*

### Role of aggregate financial development and globalization
- Purpose: assess whether broader financial development and globalization mitigate fiscal consolidation effects on firm productivity.
- Method: modify regression to include Fin_ct and interaction Fiscalcon_ct × Fin_ct (equation (5)); interest on γ1 (sign/size).
- Financial development measure: aggregate financial development index from Svirydzenka (2016) (aggregates financial institutions development and financial markets development; higher values = higher development).
- Findings (Table 10 and Tables 11–12 for sub-indexes):
  - Positive estimate on the interactive term implies higher financial development mitigates the detrimental effect of fiscal consolidation on firm-level productivity.
  - Sub-index results (financial institutions development and financial markets development) are qualitatively similar.
  - Interpretation: more developed financial systems provide more avenues for firms to access credit and financial instruments at lower cost, easing constraints during consolidation.
  - Caveat: given the sample comprises developed countries, results likely capture lower bounds.
- Globalization (KOF globalization index from Gygli et al. (2019), scale 0–100):
  - Baseline finding (Table 13): in the sample of 12 OECD countries, firms in relatively more integrated economies have lower productivity on average.
  - Interaction result: in more globalized economies experiencing fiscal consolidation, firm-level productivity is less harmed by fiscal consolidation (see columns (1) and (5) of Table 13).
  - Mechanism: globalization provides avenues to diversify risks (e.g., foreign demand offsetting domestic slack) and access to inputs/knowledge, moderating consolidation impacts.
  - De jure and de facto globalization measures yield qualitatively similar results (Tables 14–15).

### Unpacking the nature and intensity of fiscal consolidation
- Objective: determine heterogeneous impacts by consolidation intensity and by composition (tax-based vs spending-based).
- Intensity:
  - Define dummy = 1 if consolidation magnitude > mean magnitude for that country; 0 otherwise.
  - Results (Tables 16 and 17):
    - Very high episodes of fiscal consolidation are very detrimental to firm-level productivity (Table 16, columns (1) and (5)).
    - High consolidation done partly through spending cuts has a significant negative effect on firm-level productivity.
    - Low/moderate consolidation episodes do not negatively impact firm-level productivity (Table 17): moderate consolidation allows firms time to adjust, realign production, and diversify.
    - Policy implication echoed: avoid very aggressive consolidation measures where possible, as they can be more devastating.
- Composition (tax-based vs spending-based):
  - Define tax-based episode if ratio of tax hikes to GDP > ratio of spending cuts to GDP in that period; spending-based defined analogously.
  - Tax-based consolidation (Table 18):
    - Tax-based fiscal consolidation is negatively related to firm-level productivity (consistent with Alesina et al. (2017)).
    - Both tax hikes and spending cuts during tax-based episodes are detrimental to firm-level productivity (columns (2)–(4) and (6)–(8) of Table 18).
  - Spending-based consolidation (Table 19):
    - Although consolidation generally harms productivity, spending-based consolidation lessens the harm to firm-level productivity in this sample of developed countries.
    - Interpretation: developed countries with robust public infrastructure imply some spending cuts may not severely constrain firm production capacity.

### Dynamic (medium-term) response to fiscal consolidation
- Method: Jordà (2005) local projection method to trace impulse responses of firm-level productivity to fiscal consolidation.
- Findings (Figure 2; similar results using tax hikes and spending cuts reported in Figure 3):
  - Immediate (impact) effect of fiscal consolidation on firm-level productivity is negative.
  - Over the medium term, productivity quickly recovers.
  - Possible explanations:
    - Firm-level reallocation and adjustment after the initial shock.
    - Fiscal consolidation measures are assumed exogenous and may surprise firms, causing sub-optimal input combinations in the short run that are later corrected.

### Effects of granular fiscal consolidation instruments
- Question: which specific tax hikes and spending cuts most strongly relate to firm-level productivity?
- Categories analyzed (Table 6): direct taxes, indirect taxes, “not-classified-yet” (NYC) taxes, “other taxes”; public investment, transfers, NYC spending, “other spending”.
- Tax findings (Table 6, columns (1)–(2)):
  - Both direct and indirect tax hikes have negative and significant effects on firm-level productivity.
  - Mechanisms:
    - Taxes introduce distortions leading to inefficient factor combinations and reduced productivity (Liu (2011); Hsieh and Klenow (2009)).
    - Direct taxes can affect profit incentives; indirect taxes can distort pricing and resource allocation.
- Spending findings (Table 6, columns (5) and (8)):
  - Cuts in government consumption, public investment, and “other spending” have negative and significant impacts on firm-level productivity.
  - Rationale:
    - Public investment (infrastructure such as roads, railways, telecommunication) increases overall production capacity; cuts can hinder firms’ ability to produce efficiently and thus lower productivity.
- Note: NYC categories include heterogeneous items and are not discussed in depth due to interpretability challenges.

*Italic line: Source: wpiea2022126-print-pdf - 4.2    Heterogeneity and the role of macroeconomic policies*

### 4.7    Robustness checks

### 4.7 Robustness checks

### Inclusion of time fixed effects
- Purpose: control for unobserved time varying variables that could bias the relationship between fiscal policy shocks and firm-level productivity.
- Key findings (Table 7):
  - lntotalcon: -0.019 ∗∗∗ (column (1), (0.001)); -0.015 ∗∗∗ (column (2), (0.001)).
  - lntax: -0.019 ∗∗∗ (column (2), (0.001)); -0.021 ∗∗∗ (column (4), (0.001)); -0.013 ∗∗∗ (column (6), (0.001)); -0.015 ∗∗∗ (column (8), (0.001)).
  - lnspend: -0.010 ∗∗∗ (column (3), (0.001)); -0.013 ∗∗∗ (column (4), (0.001)); -0.007 ∗∗∗ (column (7), (0.001)); -0.010 ∗∗∗ (column (8), (0.001)).
  - Controls included: Country Fixed Effects, Year Fixed Effects, Country-Time Trend, additional macro variables (private credit, regulatory quality, research expenditure).
- Interpretation: Results remain qualitatively similar to baseline estimates—fiscal consolidation, tax hikes, and spending cuts are negatively related to firm-level total factor productivity after controlling for time fixed effects.

### Alternative measure of TFP
- Purpose: assess sensitivity to TFP definition (baseline uses composite variable input; robustness uses only cost of materials as variable input and estimates equation (3)).
- Key findings (Table 8):
  - lntotalcon: -0.002 ∗∗∗ (columns (1) and (2), (0.000)).
  - lntax: -0.004 ∗∗∗ (columns (2) and (4), (0.001)); -0.003 ∗∗∗ (columns (6) and (8), (0.001)).
  - lnspend: -0.002 ∗∗∗ (column (3), (0.001)); in some specifications lnspend coefficients are not significant (e.g., -0.000).
  - Controls: Country Fixed Effects, Country-Time Trend, additional macro variables.
- Interpretation: Negative relationships between fiscal consolidation (total, tax hikes, spending cuts) and firm-level productivity persist with alternative TFP measure, indicating results are not crucially dependent on TFP construction.

### Labor productivity as a mechanism
- Rationale: Labor productivity (output per labor) is an important determinant of total factor productivity.
- Key findings (Table 9):
  - lntotalcon: -0.004 ∗∗∗ (column (1), (0.001)); -0.009 ∗∗∗ (column (2), (0.001)).
  - lntax: 0.067 ∗∗∗ (column (2), (0.001)); 0.087 ∗∗∗ (column (4), (0.001)); 0.012 ∗∗∗ (columns (6) and (8), (0.001)).
  - lnspend: -0.005 ∗∗∗ (column (3), (0.001)); -0.044 ∗∗∗ (column (4), (0.001)); 0.005 ∗∗∗ (column (5), (0.001)).
  - GDP growth, inflation, trade and firm controls included; R2 rises in firm-specific variable specifications (e.g., up to 0.64 in columns (5)-(8)).
- Interpretation:
  - Total fiscal consolidation is negatively related to labor productivity.
  - Distinctive result: spending cuts are negatively related to labor productivity, while tax hikes are found to be positively related to labor productivity in these specifications—authors posit tax burdens may not be immediately passed to employees and may induce firm adjustments that temporarily benefit labor output.

### Firm size heterogeneity
- Hypothesis: Larger firms may have more resources and flexibility to adjust to adverse shocks.
- Estimation: interaction of firm size (log of labor employed) with fiscal consolidation.
- Key findings (Table 20):
  - lntotalcon: -0.014 ∗∗∗ (column (1), (0.001)).
  - lntotalcon × firm size: 0.005 ∗∗∗ (column (2), (0.000)).
  - lntax: -0.024 ∗∗∗ (columns (3)-(4), (0.001)/(0.002)); lntax × firm size: 0.007 ∗∗∗ (columns (3)-(4), (0.000)/(0.001)).
  - lnspend: -0.014 ∗∗∗ (column (3), (0.001)) and insignificant in some interactions; lnspend × firm size: 0.005 ∗∗∗ (column (3), (0.000)).
  - Other controls: lncap -0.014 ∗∗∗; lnassets 0.060 ∗∗∗; firm size (main) -0.076 ∗∗∗.
- Interpretation:
  - Fiscal consolidation is generally negatively associated with firm-level productivity.
  - Positive and significant interactions imply larger firms are better able to adjust; the overall impact is negative for firms with employment below the 65th percentile (i.e., smaller firms are more detrimentally affected).

### Additional robustness exercises (summarized)
- Firm fixed effects included: results qualitatively similar to baseline.
- Control for country debt levels: results consistent with baseline.
- Asymmetric effects across the business cycle: fiscal consolidation during recessions is particularly detrimental to firm-level productivity relative to periods of boom (distinguished using the output gap).
- Other heterogeneity analyses reported across multiple tables (Tables 5, 6, 10–19) explore interactions with Rule of law, Exchange rate, Private credit, Financial development (FD), Financial institutions development (FI), Financial markets development (FM), Globalization (KOFGI, KOFGIdj, KOFGIdf), high/low fiscal consolidations, tax-based (tb) and spending-based (sb) consolidations—many specifications show:
  - Negative baseline coefficients on fiscal consolidation measures (varying magnitudes across specifications).
  - Positive interaction terms with financial development and market depth measures (e.g., lntotalcon × FD: 0.096 ∗∗∗ (Table 10, column (1), (0.007)); lntotalcon × FM: 0.042 ∗∗∗ (Table 12, column (1), (0.004))).
  - Globalization interactions moderate effects (e.g., lntotalcon × KOFGI: 0.004 ∗∗∗ (Table 13, column (1), (0.000))).
  - High-consolidation interactions often amplify negative effects (e.g., highcon × lntotalcon: -0.005 ∗∗∗ (Table 16, columns (1)-(2), (0.001))).

### Key empirical regularities (aggregate)
- Across multiple specifications and robustness checks:
  - Fiscal consolidation is associated with negative effects on firm-level total factor productivity.
  - Tax hikes commonly show stronger negative coefficients on TFP than spending cuts in many specifications, though the labor productivity analysis indicates tax hikes can be associated with positive labor productivity effects in the short term.
  - Larger firms mitigate negative impacts—interaction with firm size is positive and significant.
  - Financial development, financial institutions development, financial markets development, and globalization measures tend to moderate (often attenuate) the negative impact of fiscal consolidation when interaction terms are included.

### Policy implications and recommendations (from conclusions)
- When undertaking fiscal consolidation, especially in countries with high government debt and a weakening productive sector:
  - Employ a focused policy mix that assesses feasibility and the fiscal measures that preserve or can increase productive capacity.
  - Avoid taxes that distort efficient use of factors of production.
  - Target reductions in non-priority government expenditure rather than across-the-board cuts.
  - Very aggressive tax hikes as the main consolidation tool are particularly harmful to firm-level productivity and growth.
  - Prefer a phased consolidation approach over the medium to long term to allow firms to adjust and reduce negative impacts.

*Source: 4.7 Robustness checks, wpiea2022126-print-pdf.*

### References

### wpiea2022126-print-pdf - References

### Major themes covered by the cited literature
- Fiscal consolidation, austerity, and macroeconomic effects
  - Alesina, A. and Ardagna, S. (1998). Tales of fiscal adjustment. Economic policy, 13(27):488–545.
  - Alesina, A. and Ardagna, S. (2010). Large changes in fiscal policy: taxes versus spending. Tax policy and the economy, 24(1):35–68.
  - Alesina, A., Favero, C. A., and Giavazzi, F. (2018). What do we know about the effects of austerity? In AEA Papers and Proceedings, volume 108, pages 524–30.
  - Devries, P., Guajardo, J., Leigh, D., and Pescatori, A. (2011). A new action-based dataset of fiscal consolidation. IMF Working Papers, pages 1–90.
  - Guajardo, J., Leigh, D., and Pescatori, A. (2014). Expansionary austerity? international evidence. Journal of the European Economic Association, 12(4):949–968.
  - Bandiera, O., Barankay, I., and Rasul, I. (2009). Social connections and incentives in the workplace: Evidence from personnel data. Econometrica, 77(4):1047–1094. (methodological relevance to labor and policy studies)

- Firm-level productivity, misallocation, and market structure
  - Hsieh, C.-T. and Klenow, P. J. (2009). Misallocation and manufacturing tfp in china and india. The Quarterly journal of economics, 124(4):1403–1448.
  - De Loecker, J., Eeckhout, J., and Unger, G. (2020). The rise of market power and the macroeconomic implications. The Quarterly Journal of Economics, 135(2):561–644.
  - Restuccia, D. and Rogerson, R. (2008). Policy distortions and aggregate productivity with heterogeneous establishments. Review of Economic dynamics, 11(4):707–720.
  - Syverson, C. (2011). What determines productivity? Journal of Economic literature, 49(2):326–65.
  - Olley, G. S. and Pakes, A. (1996). The dynamics of productivity in the telecommunications equipment industry. Econometrica, 64(6):1263–1297.

- Trade, openness, and productivity spillovers
  - Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. econometrica, 71(6):1695–1725.
  - Alcala, F. and Ciccone, A. (2004). Trade and productivity. The Quarterly journal of economics, 119(2):613–646.
  - Bernard, A. B., Jensen, J. B., and Schott, P. K. (2006). Trade costs, firms and productivity. Journal of monetary Economics, 53(5):917–937.
  - Shu, P. and Steinwender, C. (2019). The impact of trade liberalization on firm productivity and innovation. Innovation Policy and the Economy, 19(1):39–68.

- Infrastructure, public goods, and productivity
  - Agenor, P.-R. (2010). A theory of infrastructure-led development. Journal of Economic Dynamics and Control, 34(5):932–950.
  - Duggal, V. G., Saltzman, C., and Klein, L. R. (1999). Infrastructure and productivity: a nonlinear approach. Journal of econometrics, 92(1):47–74.
  - Mamatzakis, E. C. (2007). Eu infrastructure investment and productivity in greek manufacturing. Journal of Policy Modeling, 29(2):335–344.

- Taxation, corporate taxes, and allocation effects
  - Fatica, S. et al. (2013). Do corporate taxes distort capital allocation? cross-country evidence from industry-level data. Technical report, Directorate General Economic and Financial Affairs (DG ECFIN), European . . . .
  - Schwellnus, C. and Arnold, J. (2008). Do corporate taxes reduce productivity and investment at the firm level?: Cross-country evidence from the amadeus dataset.
  - Romer, C. D. and Romer, D. H. (2010). The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks. American Economic Review, 100(3):763–801.
  - Chen, C., Dabla-Norris, M. E., Rappaport, J., and Zdzienicka, M. A. (2019). Political costs of tax-based consolidations. International Monetary Fund.

### Methodological approaches and data sources represented
- Firm-level production function estimation and proxy methods
  - Levinsohn, J. and Petrin, A. (2003). Estimating production functions using inputs to control for unobservables. The review of economic studies, 70(2):317–341.
  - Ackerberg, D. A., Caves, K., and Frazer, G. (2015). Identification properties of recent production function estimators. Econometrica, 83(6):2411–2451.
  - Wooldridge, J. M. (2009). On estimating firm-level production functions using proxy variables to control for unobservables. Economics letters, 104(3):112–114.
  - Olley, G. S. and Pakes, A. (1996). The dynamics of productivity in the telecommunications equipment industry. Econometrica, 64(6):1263–1297.

- Narrative and local-projection identification of fiscal shocks
  - Romer, C. D. and Romer, D. H. (2010). The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks. American Economic Review, 100(3):763–801.
  - Jordà, Ò. (2005). Estimation and inference of impulse responses by local projections. American economic review, 95(1):161–182.
  - Cloyne, J. (2013). Discretionary tax changes and the macroeconomy: new narrative evidence from the united kingdom. American Economic Review, 103(4):1507–28.

- Databases, indices, and measurement tools
  - Mbaye, S., Badia, M. M. M., and Chae, K. (2018). Global debt database: Methodology and sources. International Monetary Fund.
  - Kauffmann, D., Kraay, A., and Mastruzzi, M. (2010). The worldwide governance indicators: A summary of methodology, data and analytical issues. World Bank Policy Research, pages 2–29.
  - Svirydzenka, K. (2016). Introducing a new broad-based index of financial development.
  - Gygli, S., Haelg, F., Potrafke, N., and Sturm, J.-E. (2019). The kof globalisation index–revisited. The Review of International Organizations, 14(3):543–574.

### Recurring empirical contexts and regions
- Advanced economies, euro area, and OECD countries
  - Forni, L., Gerali, A., and Pisani, M. (2010). The macroeconomics of fiscal consolidations in euro area countries. Journal of Economic Dynamics and Control, 34(9):1791–1812.
  - Alesina, A. and Roberti, P. (1995). Fiscal expansions and adjustments in oecd economies. Economic Policy, 10(21):207–47.
- China, India, Latin America, and emerging markets
  - Brandt, L., Van Biesebroeck, J., Wang, L., and Zhang, Y. (2017). Wto accession and performance of chinese manufacturing firms. American Economic Review, 107(9):2784–2820.
  - Hsieh, C.-T. and Klenow, P. J. (2009). Misallocation and manufacturing tfp in china and india. The Quarterly journal of economics, 124(4):1403–1448.
  - Carriere-Swallow, M. Y., David, M. A., and Leigh, M. D. (2018). The Macroeconomic Effects of Fiscal Consolidation in Emerging Economies: Evidence from Latin America. International Monetary Fund.
  - Diniz, A. (2018). Effects of fiscal consolidations in latin america. IMF Economic Review, 66(4):694–731.

- Firm- and plant-level evidence across industries (manufacturing, food, telecommunications, ready-mix concrete)
  - Collard-Wexler, A. (2013). Demand fluctuations in the ready-mix concrete industry. Econometrica, 81(3):1003–1037.
  - Olper, A., Curzi, D., and Raimondi, V. (2017). Imported intermediate inputs and firms’ productivity growth: Evidence from the food industry. Journal of Agricultural Economics, 68(1):280–300.
  - Syverson, C. (2004a). Market structure and productivity: A concrete example. Journal of Political Economy, 112(6):1181–1222.

### Methodological and policy implications reflected in the citations
- Use of action-based and narrative fiscal shock identification to assess real effects of consolidation and tax changes (Devries et al., Romer & Romer, Cloyne).
- Firm-level production function estimation and misallocation analyses to link policy distortions and aggregate productivity (Levinsohn & Petrin; Hsieh & Klenow; Restuccia & Rogerson).
- Cross-country and industry evidence on taxation, infrastructure, trade liberalization, and financial development as channels affecting firm productivity and investment (Fatica et al.; Agenor; Melitz; Svirydzenka).

*Fiscal Consolidation and Firm Level Productivity: Evidence from Advanced Economies Working Paper No. WP/22/126*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022126-print-pdf.pdf_