Fiscal Consolidation and Firm Level Productivity: Evidence from Advanced Economies

July 1, 2022

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Maxwell Tuuli, and Ngo Van Long. Fiscal Consolidation and Firm Level Productivity: Evidence from Advanced Economies, (USA: International Monetary Fund, 2022) accessed November 23, 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

Productivity dispersion across countries has led to several studies on the determinants of firm level productivity and the role of macroeconomic policies in determining productivity. In this paper, we investigate the effect of fiscal consolidation on firm level productivity in 12 advanced economies by combining an updated dataset of fiscal consolidation measures with firm level productivity. We find that fiscal consolidation (i.e., discretionary tax hikes and spending cuts), is detrimental to firm level productivity in advanced economies. We also find that high levels of fiscal consolidation are particularly harmful to firm level productivity compared to lower levels of fiscal consolidation. Furthermore, we find that tax based fiscal consolidation hinders firm level productivity more compared to spending based fiscal consolidation. This implies that the size and composition of fiscal consolidation matter in understanding the relationship between fiscal consolidation and firm level productivity.

Subject: Financial markets, Financial sector development, Fiscal consolidation, Fiscal policy, Production, Productivity, Total factor productivity

Keywords: Effect of fiscal consolidation, Financial sector development, Firm level productivity, Fiscal consolidation, Fiscal consolidation matter, Fiscal consolidation measure, Global, Productivity, Productivity dispersion, Spending, Taxes, Total Factor Productivity

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/126
Stock No:

WPIEA2022126
ISBN:

9798400214462
ISSN:

1018-5941

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