The (Subjective) Well-Being Cost of Fiscal Policy Shocks

January 17, 2020

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Format: Chicago

Kodjovi M. Eklou, and Mamour Fall. The (Subjective) Well-Being Cost of Fiscal Policy Shocks, (USA: International Monetary Fund, 2020) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Do discretionary spending cuts and tax increases hurt social well-being? To answer this question, we combine subjective well-being data covering over half a million of individuals across 13 European countries, with macroeconomic data on fiscal consolidations. We find that fiscal consolidations reduce individual well-being in the short run, especially when they are based on spending cuts. In addition, we show that accompanying monetary and exchange rate policies (disinflation, depreciations and the liberalization of capital flows) mitigate the well-being cost of fiscal consolidations. Finally, we investigate the well-being consequences of the two well-knowns expansionary fiscal consolidations episodes taking place in the 80s (in Denmark and Ireland). We find that even expansionary fiscal consolidations can have well-being costs. Our results may therefore shed some light on why some governments may choose to consolidate through taxes even at the cost of economic growth. Indeed, if spending cuts are to generate a large well-being loss, they can trigger an opposition and protest against a fiscal consolidation plan and hence making it politically costly.

Subject: Active labor market policies, Consumption taxes, Fiscal consolidation, Fiscal policy, Income inequality, Labor, National accounts, Taxes

Keywords: Active labor market policies, Consumption taxes, Dampening effect, Effect of fiscal consolidations, Europe, Fiscal consolidation, Fiscal Consolidations, Fiscal policy shock, Income inequality, Inflation rate, Public goods, Recessionary effect, Spending cut size, Spending cuts, Subjective Well-Being, Substitution effect, Tax hikes, Well-being cost, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/005
Stock No:

WPIEA2020005
ISBN:

9781513525846
ISSN:

1018-5941

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