Expansionary Austerity New International Evidence

By Daniel Leigh, Andrea Pescatori, Jaime Guajardo

July 1, 2011

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Daniel Leigh, Andrea Pescatori, and Jaime Guajardo. Expansionary Austerity New International Evidence, (USA: International Monetary Fund, 2011) accessed November 21, 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

This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine the historical record, including Budget Speeches and IMFdocuments, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.

Subject: Exchange rate arrangements, Expenditure, Fiscal consolidation, Fiscal policy, Foreign exchange, Government debt management, National accounts, Private consumption, Public financial management (PFM)

Keywords: B. estimation result, Contractions hypothesis, Economic activity, Effect of fiscal consolidation, Estimation result, Exchange rate arrangements, Fiscal consolidation, Fiscal consolidation, Fiscal policy, Fiscal policy change, Fiscal policy shock, Fiscal policy stance, Global, Government debt management, Government expenditure, IMF document, Output fluctuations, Private consumption, Real GDP, Real GDP relative, Taxation, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/158
Stock No:

WPIEA2011158
ISBN:

9781455294695
ISSN:

1018-5941

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