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Τhe effects of fiscal consolidation in OECD countries

Author

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  • Georgantas, Georgios
  • Kasselaki, Maria
  • Tagkalakis, Athanasios

Abstract

Fiscal consolidation is essential for safeguarding fiscal sustainability in many OECD countries in the post COVID-19 era. Several empirical studies have presented evidence in favor of expansionary fiscal consolidations. This paper using the local projection method, investigates the short-to medium-term effects of unanticipated fiscal consolidation shocks in 24 OECD countries from 1990 to 2019. Fiscal adjustment is contractionary according to our baseline model. This effect is more pronounced in recessions, in high debt countries, in closed economies and when monetary conditions are tight. Therefore, the decline in the public debt ratio is relatively small. Spending-based adjustments that are implemented in recessions, in periods with tight monetary conditions and when the debt ratio is above 80% are self-defeating. Fiscal consolidations that are initiated in expansions, in low debt countries, when monetary conditions are loose and in open economies can be expansionary and lead to a more pronounced decline in the debt ratio.

Suggested Citation

  • Georgantas, Georgios & Kasselaki, Maria & Tagkalakis, Athanasios, 2023. "Τhe effects of fiscal consolidation in OECD countries," Economic Modelling, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:ecmode:v:118:y:2023:i:c:s0264999322003364
    DOI: 10.1016/j.econmod.2022.106099
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    More about this item

    Keywords

    Fiscal consolidation; Public debt; Recessions and expansions; Monetary conditions; Trade openness;
    All these keywords.

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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