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On the output cost of fiscal consolidations: an empirical investigation on tax and spending multipliers for a sample of OECD economies
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Resumo(s)
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.
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Macroeconomics Fiscal consolidations Local projections Rational expectations