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Non-linearities in fiscal policy: The role of debt

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  • Fotiou, Alexandra

Abstract

This paper assesses how a country’s initial debt level affects the effectiveness of fiscal policy. Using a panel of 13 countries between 1980 and 2014, I find that when debt is high, fiscal consolidations based on tax increases are in general self-defeating, in that they result in an increase of the debt-to-GDP ratio. Instead, cutting public expenditure has a less pronounced effect on economic activity and can stabilize debt.

Suggested Citation

  • Fotiou, Alexandra, 2022. "Non-linearities in fiscal policy: The role of debt," European Economic Review, Elsevier, vol. 150(C).
    • Handle: RePEc:eee:eecrev:v:150:y:2022:i:c:s0014292122001210
    DOI: 10.1016/j.euroecorev.2022.104212
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    Cited by:

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    2. Fleischhacker, Jan, 2024. "Fiscal policy and the business cycle: An argument for non-linear policy rules," MPRA Paper 122497, University Library of Munich, Germany.
    3. Giovanna Ciaffi & Matteo Deleidi & Michele Capriati, 2024. "Government spending, multipliers, and public debt sustainability: an empirical assessment for OECD countries," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 41(2), pages 521-542, July.
    4. Bandeira, Guilherme & Caballé, Jordi & Vella, Eugenia, 2022. "Emigration and fiscal austerity in a depression," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    5. Checherita-Westphal, Cristina & Pesso, Tom, 2024. "Fiscal policy and inflation: accounting for non-linearities in government debt," Working Paper Series 2996, European Central Bank.

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    More about this item

    Keywords

    Non-linearities; Debt; Recessions; Expansions; Fiscal consolidations; Narrative approach; Interacted-STVAR;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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