Fiscal consolidations

Vol: 
57/2021
Author name: 
Brueckner M
Year: 
2021
Month: 
July
Abstract: 

I examine whether action-based fiscal consolidations are exogenous to contemporaneous GDP growth. Based on the narrative record, these fiscal consolidations had the primary objective to reduce a budget deficit. I find that temperature changes, the GDP growth rate of trading partners, and an international commodity price index have significant: (i) negative contemporaneous effects on action-based fiscal consolidations; (ii) positive contemporaneous effects on GDP growth. These results imply that it is highly unlikely that action-based fiscal consolidations are exogenous to contemporaneous GDP growth. Using an instrumental variables approach, I find that action-based fiscal consolidations have significant positive effects on GDP growth.

Publication file: 

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