The Output Effects of Fiscal Consolidations: Does Spending Composition Matter?
This paper studies whether changes in the composition of public spending affect the macroeconomic consequences of fiscal consolidations. Based on a sample of 44 developing countries and 26 advanced economies during 1980-2019, results show that while fiscal consolidations tend to be on average, contractionary, the size of the output fall depends on the behavior of public investment vis-a-vis public consumption during the fiscal adjustment, with heterogeneous responses growing over time. When public investment is penalized relative to public consumption and thus, its share in public expenditures decreases, a 1 percent of GDP consolidation reduces output by 0.7 percent within three years of the fiscal shock. In contrast, safeguarding public investment from budget cuts vis-a-vis public consumption can neutralize the contractionary effects of fiscal adjustments on impact, and can even spur output growth over the medium term. The component of GDP that mostly drives the heterogeneity between both types of adjustments is private investment. The results hold up to a number of robustness tests, including alternative identification strategies of fiscal shocks. The findings have policy implications for the design of fiscal adjustment strategies to protect economic growth as countries recover from the coronavirus pandemic.
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Language: | English |
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Inter-American Development Bank
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Subjects: | Fiscal Consolidation, Gross Domestic Product, Economy, Fiscal Transparency, Macroeconomy, Fiscal Policy, Economic Development, Emerging Market, H50 - National Government Expenditures and Related Policies: General, H54 - Infrastructures • Other Public Investment and Capital Stock, O40 - Economic Growth and Aggregate Productivity: General, Fiscal consolidations;public investment;public consumption;?scal multiplier, |
Online Access: | http://dx.doi.org/10.18235/0003881 https://publications.iadb.org/en/output-effects-fiscal-consolidations-does-spending-composition-matter |
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dig-bid-node-314432023-09-12T20:11:28ZThe Output Effects of Fiscal Consolidations: Does Spending Composition Matter? 2021-12-22T00:00:00+0000 http://dx.doi.org/10.18235/0003881 https://publications.iadb.org/en/output-effects-fiscal-consolidations-does-spending-composition-matter Inter-American Development Bank Fiscal Consolidation Gross Domestic Product Economy Fiscal Transparency Macroeconomy Fiscal Policy Economic Development Emerging Market H50 - National Government Expenditures and Related Policies: General H54 - Infrastructures • Other Public Investment and Capital Stock O40 - Economic Growth and Aggregate Productivity: General Fiscal consolidations;public investment;public consumption;?scal multiplier This paper studies whether changes in the composition of public spending affect the macroeconomic consequences of fiscal consolidations. Based on a sample of 44 developing countries and 26 advanced economies during 1980-2019, results show that while fiscal consolidations tend to be on average, contractionary, the size of the output fall depends on the behavior of public investment vis-a-vis public consumption during the fiscal adjustment, with heterogeneous responses growing over time. When public investment is penalized relative to public consumption and thus, its share in public expenditures decreases, a 1 percent of GDP consolidation reduces output by 0.7 percent within three years of the fiscal shock. In contrast, safeguarding public investment from budget cuts vis-a-vis public consumption can neutralize the contractionary effects of fiscal adjustments on impact, and can even spur output growth over the medium term. The component of GDP that mostly drives the heterogeneity between both types of adjustments is private investment. The results hold up to a number of robustness tests, including alternative identification strategies of fiscal shocks. The findings have policy implications for the design of fiscal adjustment strategies to protect economic growth as countries recover from the coronavirus pandemic. Inter-American Development Bank Martín Ardanaz Eduardo A. Cavallo Alejandro Izquierdo Jorge Puig IDB Publications en |
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Fiscal Consolidation Gross Domestic Product Economy Fiscal Transparency Macroeconomy Fiscal Policy Economic Development Emerging Market H50 - National Government Expenditures and Related Policies: General H54 - Infrastructures • Other Public Investment and Capital Stock O40 - Economic Growth and Aggregate Productivity: General Fiscal consolidations;public investment;public consumption;?scal multiplier Fiscal Consolidation Gross Domestic Product Economy Fiscal Transparency Macroeconomy Fiscal Policy Economic Development Emerging Market H50 - National Government Expenditures and Related Policies: General H54 - Infrastructures • Other Public Investment and Capital Stock O40 - Economic Growth and Aggregate Productivity: General Fiscal consolidations;public investment;public consumption;?scal multiplier |
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Fiscal Consolidation Gross Domestic Product Economy Fiscal Transparency Macroeconomy Fiscal Policy Economic Development Emerging Market H50 - National Government Expenditures and Related Policies: General H54 - Infrastructures • Other Public Investment and Capital Stock O40 - Economic Growth and Aggregate Productivity: General Fiscal consolidations;public investment;public consumption;?scal multiplier Fiscal Consolidation Gross Domestic Product Economy Fiscal Transparency Macroeconomy Fiscal Policy Economic Development Emerging Market H50 - National Government Expenditures and Related Policies: General H54 - Infrastructures • Other Public Investment and Capital Stock O40 - Economic Growth and Aggregate Productivity: General Fiscal consolidations;public investment;public consumption;?scal multiplier Inter-American Development Bank The Output Effects of Fiscal Consolidations: Does Spending Composition Matter? |
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This paper studies whether changes in the composition of public spending affect the macroeconomic consequences of fiscal consolidations. Based on a sample of 44 developing countries and 26 advanced economies during 1980-2019, results show that while fiscal consolidations tend to be on average, contractionary, the size of the output fall depends on the behavior of public investment vis-a-vis public consumption during the fiscal adjustment, with heterogeneous responses growing over time. When public investment is penalized relative to public consumption and thus, its share in public expenditures decreases, a 1 percent of GDP consolidation reduces output by 0.7 percent within three years of the fiscal shock. In contrast, safeguarding public investment from budget cuts vis-a-vis public consumption can neutralize the contractionary effects of fiscal adjustments on impact, and can even spur output growth over the medium term. The component of GDP that mostly drives the heterogeneity between both types of adjustments is private investment. The results hold up to a number of robustness tests, including alternative identification strategies of fiscal shocks. The findings have policy implications for the design of fiscal adjustment strategies to protect economic growth as countries recover from the coronavirus pandemic. |
author2 |
Martín Ardanaz |
author_facet |
Martín Ardanaz Inter-American Development Bank |
topic_facet |
Fiscal Consolidation Gross Domestic Product Economy Fiscal Transparency Macroeconomy Fiscal Policy Economic Development Emerging Market H50 - National Government Expenditures and Related Policies: General H54 - Infrastructures • Other Public Investment and Capital Stock O40 - Economic Growth and Aggregate Productivity: General Fiscal consolidations;public investment;public consumption;?scal multiplier |
author |
Inter-American Development Bank |
author_sort |
Inter-American Development Bank |
title |
The Output Effects of Fiscal Consolidations: Does Spending Composition Matter? |
title_short |
The Output Effects of Fiscal Consolidations: Does Spending Composition Matter? |
title_full |
The Output Effects of Fiscal Consolidations: Does Spending Composition Matter? |
title_fullStr |
The Output Effects of Fiscal Consolidations: Does Spending Composition Matter? |
title_full_unstemmed |
The Output Effects of Fiscal Consolidations: Does Spending Composition Matter? |
title_sort |
output effects of fiscal consolidations: does spending composition matter? |
publisher |
Inter-American Development Bank |
url |
http://dx.doi.org/10.18235/0003881 https://publications.iadb.org/en/output-effects-fiscal-consolidations-does-spending-composition-matter |
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AT interamericandevelopmentbank theoutputeffectsoffiscalconsolidationsdoesspendingcompositionmatter AT interamericandevelopmentbank outputeffectsoffiscalconsolidationsdoesspendingcompositionmatter |
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1806237815851188224 |