Expansionary Fiscal Austerity
The expansionary fiscal contraction (EFC) hypothesis states that fiscal austerity can increase output or consumption when a country is under heavy debt burdens because it sends positive signal about the country's solvency situation and long-term economic wellbeing. Empirical tests of this hypothesis have suffered from identification concerns due to data sources and empirical methodology. Using a sample of OECD countries between 1978 and 2014, this paper combines new IMF narrative data and the proxy structural Vector Auto-regression (SVAR) method to examine whether fiscal austerities can be expansionary when debt levels are high. Fiscal austerities are measured as 1) narrative fiscal shocks and 2) structural shocks from a proxy SVAR. Additionally, this paper uses a model-based approach to determine the cutoff debt level beyond which EFC is expected to be observed. This paper finds empirical evidence in support of the EFC hypothesis for OECD countries: results for output are driven by changes in tax rates and are robust to how one defines a high-debt regime and how one measures austerity.
| Main Author: | |
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| Format: | Working Paper biblioteca |
| Language: | English |
| Published: |
World Bank, Washington, DC
2020-07
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| Subjects: | FISCAL POLICY, FISCAL CONSOLIDATION, STRUCTURAL VECTOR AUTOREGRESSION, DEBT SUSTAINABILITY, ECONOMIC CRISIS, FISCAL SHOCK, ECONOMIC SHOCK, AUSTERITY, DEBT BURDEN, |
| Online Access: | http://documents.worldbank.org/curated/en/430691596113581519/Expansionary-Fiscal-Austerity-New-International-Evidence https://hdl.handle.net/10986/34262 |
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| Summary: | The expansionary fiscal contraction
(EFC) hypothesis states that fiscal austerity can increase
output or consumption when a country is under heavy debt
burdens because it sends positive signal about the
country's solvency situation and long-term economic
wellbeing. Empirical tests of this hypothesis have suffered
from identification concerns due to data sources and
empirical methodology. Using a sample of OECD countries
between 1978 and 2014, this paper combines new IMF narrative
data and the proxy structural Vector Auto-regression (SVAR)
method to examine whether fiscal austerities can be
expansionary when debt levels are high. Fiscal austerities
are measured as 1) narrative fiscal shocks and 2) structural
shocks from a proxy SVAR. Additionally, this paper uses a
model-based approach to determine the cutoff debt level
beyond which EFC is expected to be observed. This paper
finds empirical evidence in support of the EFC hypothesis
for OECD countries: results for output are driven by changes
in tax rates and are robust to how one defines a high-debt
regime and how one measures austerity. |
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