DP9105 The output effect of fiscal consolidations

Author(s): Alberto F Alesina , Carlo A. Favero , Francesco Giavazzi

Publication Date: August 2012

Keyword(s): confidence , fiscal adjustment , investment , output

JEL(s): E62 , H60

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP9105.asp.asp

Fiscal consolidations achieved by means of spending cuts are much less costly in terms of output losses than tax-based ones. The difference cannot be explained by accompanying policies, including monetary policy, and it is mainly due to the different response of business confidence and private investment. We obtain these results by studying the effects of the adoption of fiscal consolidation plans (rather than isolated shocks), that is combinations of tax increases and spending cuts, some unanticipated, other anticipated, in a sample of 16 OECD economies.