## Can Fiscal Consolidation Announcements Help Anchor Inflation Expectations?

_IMF Working Papers, March 15, 2024_

## Source details

**Canonical URL:** [Can Fiscal Consolidation Announcements Help Anchor Inflation Expectations?](https://www.imf.org/en/publications/wp/issues/2024/03/15/can-fiscal-consolidation-announcements-help-anchor-inflation-expectations-545122)

## Other formats

- [Markdown version](/en/publications/wp/issues/2024/03/15/can-fiscal-consolidation-announcements-help-anchor-inflation-expectations-545122/index.md)
- [Structured JSON version](/en/publications/wp/issues/2024/03/15/can-fiscal-consolidation-announcements-help-anchor-inflation-expectations-545122/index.json)
- [Bundle manifest](/en/publications/wp/issues/2024/03/15/can-fiscal-consolidation-announcements-help-anchor-inflation-expectations-545122/bundle-manifest.json)

## Bibliographic details
- Authors: Antonio David, Samuel Pienknagura, Juan Yepez
- Published: March 15, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400268267.001

---

### Abstract and data
- Quarterly data and a novel database on fiscal policy consolidation announcements are used for a sample of advanced economies and emerging markets to quantify the effects of fiscal tightening on inflation expectations.
- Sample scope: advanced economies and emerging markets.
- Methods: narrative identification of fiscal consolidation announcements; analysis of inflation expectations at multiple horizons.

### Main findings
- Fiscal consolidation announcements reduce inflation expectations over the medium-term (three and five-years ahead), but not in the short-term (one-year ahead).
- There is some evidence that consolidation announcements reduce “disagreement” about expected future inflation at longer horizons.
- The inflation anchoring role of consolidation announcements is enhanced by:
  - the strength of a country’s fiscal and monetary frameworks, and
  - when fiscal and monetary policy work in tandem.
- Initial conditions matter: inflation expectation’s response to consolidation announcements is larger in periods of high contemporaneous inflation.
- The effectiveness of fiscal consolidation in controlling realized inflation depends greatly on the response of inflation expectations to consolidation announcements.
- Policy implication: fiscal policy is crucial to anchor inflation expectations and is a key element of a credible disinflationary process.

### Policy-relevant heterogeneity and mechanisms
- Strength of institutions:
  - Stronger fiscal frameworks increase the inflation-anchoring effect of consolidation announcements.
  - Stronger monetary frameworks likewise enhance the effect.
- Policy coordination:
  - When fiscal and monetary policy work in tandem, consolidation announcements have a larger anchoring effect.
- Macroeconomic state dependence:
  - High contemporaneous inflation amplifies the response of inflation expectations to consolidation announcements.

---

## Content in this bundle

- **Working Paper**
  - [Working Paper (Markdown version)](/-/media/files/publications/wp/2024/english/wpiea2024060-print-pdf.pdf.md){rel="alternate" type="text/markdown"}
  - [Working Paper (PDF)](/-/media/files/publications/wp/2024/english/wpiea2024060-print-pdf.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2024/03/15/can-fiscal-consolidation-announcements-help-anchor-inflation-expectations-545122_