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The (non-)Keynesian effects of fiscal austerity
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Resumo(s)
We empirically assess whether the negative response of private consumption and private investment to fiscal consolidation usually expected is reversed. We focus on a sample of 174 countries between 1970 and 2018 to determine episodes of fiscal consolidations using three alternative measures of the cyclically adjusted primary balance: (1) an International Monetary Fund (IMF)-World Economic Outlook (WEO) based measure, (2) a Hodrick-Prescott–based measure, and (3) a measure based on Hamilton (2018). We find that, first, increases in government consumption have a Keynesian effect on real per capita private consumption; second, tax increases have a positive effect on private consumption when a fiscal consolidation occurs; and, third, fiscal contraction has a crowding-in effect on private investment. Moreover, expansionary fiscal consolidations occur in highly indebted advanced economies, in particular, after an increase in taxes. We conclude that the negative effects of taxation on private consumption are larger when developing economies are experiencing a financial crisis and are not consolidating.
Descrição
Funding Information: We thank the editor and an anonymous referee for very useful comments. This work was supported by a grant from Fundação para a Ciência e a Tecnologia (FCT), grant number ( UIDB/05069/2020 ). The opinions expressed here are those of the authors and do not necessarily reflect those of the authors’ employers. Any remaining errors are solely the authors’ responsibility. UECE is supported by FCT . Publisher Copyright: © 2022 Elsevier B.V.
Palavras-chave
Consumption Endogeneity Filtering Financial crises Fiscal consolidation Investment Non-Keynesian effects Panel data Economics and Econometrics