Fiscal Consolidations and Growth: Does Speed Matter?

November 11, 2013

Preview Citation

Format: Chicago

Steven Pennings, and . Esther Perez Ruiz Fiscal Consolidations and Growth: Does Speed Matter?, (USA: International Monetary Fund, 2013) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Should fiscal consolidations be front-loaded or proceed at a more steady pace, and how does this affect growth? We make an attempt to address this question using a three-step methodology. First, we modify a standard regression of growth on consolidation size to allow speed to affect the multiplier. Second, using the narrative dataset of Devries and others (2011), we construct a new sample of multi-year consolidation episodes for 17 advanced economies over 1978-2009. Third, we develop a novel concept of speed to measure the pace of the consolidation episodes identified in the data. The main empirical finding is that fast episodes have higher multipliers than gradual consolidations. This provides some preliminary support for consolidating at a steady pace, market access and a credible adjustment plan permitting. However, as the sample size is small, identifying mechanisms and testing robustness is difficult, and so our findings should not be interpreted causally.

Subject: Central bank policy rate, Exchange rate arrangements, Financial crises, Financial services, Fiscal consolidation, Fiscal multipliers, Fiscal policy, Foreign exchange, Public debt

Keywords: Anticipation effects, Central bank policy rate, Consolidation episode, Control variable, Exchange rate, Exchange rate arrangements, Fiscal consolidation, Fiscal multipliers, Fiscal policy, Global, Government expenditure, Multiplier equation, Multiplier estimate, Multiplier regression, Run multiplier, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/230
Stock No:

WPIEA2013230
ISBN:

9781475517866
ISSN:

1018-5941

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