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Is fiscal consolidation self-defeating? A panel-VAR analysis for the Euro area countries

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  • Attinasi, Maria Grazia
  • Metelli, Luca

Abstract

This paper studies the effects of fiscal consolidation on the debt-to-GDP ratio of 11 Euro area countries over the period 2000Q1-2012Q1. Using a quarterly Panel VAR allows us to trace out the dynamics of the debt-to-GDP ratio following a fiscal shock and to disentangle the main channels through which fiscal consolidation affects the debt ratio. We define a fiscal consolidation episode as self-defeating if the level of the debt-to-GDP ratio does not decrease compared to the pre-shock level. Our main finding is that when consolidation is implemented via a cut in government primary spending, the debt ratio, after an initial increase, falls to below its pre-shock level. When instead the consolidation is implemented via an increase in government revenues, the initial increase in the debt ratio is stronger and, eventually, the debt ratio reverts to its pre-shock level, resulting in what we call self-defeating consolidation.

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  • Attinasi, Maria Grazia & Metelli, Luca, 2017. "Is fiscal consolidation self-defeating? A panel-VAR analysis for the Euro area countries," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 147-164.
    • Handle: RePEc:eee:jimfin:v:74:y:2017:i:c:p:147-164
    DOI: 10.1016/j.jimonfin.2017.03.009
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    5. Favero, Carlo A. & ,, 2019. "Austerity and Public debt Dynamics," CEPR Discussion Papers 14072, C.E.P.R. Discussion Papers.
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    7. Agnello, Luca & Castro, Vítor & Sousa, Ricardo M., 2023. "A quest between fiscal and market discipline," Economic Modelling, Elsevier, vol. 119(C).
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    More about this item

    Keywords

    Fiscal consolidation; Debt trajectory; Panel VAR; Fiscal stress;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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