Expansionary Austerity New International Evidence
IMF Working Papers, July 1, 2011
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- Expansionary Austerity New International Evidence
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Bibliographic details
- Authors: Daniel Leigh, Andrea Pescatori, Jaime Guajardo
- Published: July 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455294695.001
Summary and main findings
- Investigates the short-term effects of fiscal consolidation on economic activity in OECD economies.
- Uses historical records, including Budget Speeches and IMF documents, to identify fiscal policy changes motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions.
- Using this new dataset, estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP.
- Estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.
Methodology and data
- Identification approach: examination of Budget Speeches and IMF documents to identify fiscal policy changes driven by deficit-reduction motives rather than prospective economic conditions.
- New dataset constructed from historical records to isolate fiscal consolidations not responding to expected cyclical conditions.
- Comparative estimation: contrasts results using the new dataset with estimates using conventional measures of the fiscal policy stance commonly used in the literature.
Policy implications and interpretation
- Evidence from the authors’ preferred identification strategy indicates fiscal consolidations are associated with contractionary effects on private domestic demand and GDP in the short term.
- Conventional measures that have supported the expansionary fiscal contractions hypothesis may be biased toward showing expansionary effects; policymakers should interpret such evidence with caution.
Subjects and keywords
- Subjects: Exchange rate arrangements, Expenditure, Fiscal consolidation, Fiscal policy, Foreign exchange, Government debt management, National accounts, Private consumption, Public financial management (PFM)
- Keywords: B. estimation result, contractions hypothesis, economic activity, effect of fiscal consolidation, estimation result, Exchange rate arrangements, fiscal consolidation, Fiscal consolidation, Fiscal policy, fiscal policy change, fiscal policy shock, fiscal policy stance, Global, Government debt management, government expenditure, IMF document, output fluctuations, Private consumption, real GDP, real GDP relative, taxation, WP