On the output cost of fiscal consolidations: an empirical investigation on tax and spending multipliers for a sample of OECD economies

Abstract

We estimate the output costs of fiscal contractions and distinguish between tax-based and expenditure-based adjustments, employing narratively identified fiscal measures. While the studies that use narrative fiscal plans in VARs find short-lasting effects of expenditure-based consolidations, this result is not maintained in a recently developed method of including fiscal shocks in Local Projections. We argue that the Impulse Responses from this approach are inconsistent and augment the Local Projections equations with a term capturing the expectation of future fiscal measures, recovering the results of the previous literature and finding that expenditure-based consolidations tend to be less recessive than tax-based consolidations.