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Critical thresholds for budget consolidations: a semi-parametric approach

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  • Arin
  • Torben Kuhlenkasper
  • Nandialath

Abstract

While a lot is known regarding the determinants of successful fiscal consolidations, previous studies do not allow for the possibility of nonlinearities in factors impacting budget consolidations. By using a semi-parametric modelling approach employing penalized spline regression on a data-set for 28 OECD countries for the period 1978-2007, we demonstrate the existence of critical thresholds not only for the initial debt level but also for the accompanying monetary policy. The latter result shows when monetary policy matters most and suggests, counter to previous studies, that too lax a monetary policy decreases the success probability of a fiscal adjustment episode.

Suggested Citation

  • Arin & Torben Kuhlenkasper & Nandialath, 2015. "Critical thresholds for budget consolidations: a semi-parametric approach," Applied Economics Letters, Taylor & Francis Journals, vol. 22(16), pages 1293-1297, November.
    • Handle: RePEc:taf:apeclt:v:22:y:2015:i:16:p:1293-1297
    DOI: 10.1080/13504851.2015.1026574
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    References listed on IDEAS

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    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    2. Arin, K. Peren & Chmelarova, Viera & Feess, Eberhard & Wohlschlegel, Ansgar, 2011. "Why are corrupt countries less successful in consolidating their budgets?," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 521-530, August.
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    6. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
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    Cited by:

    1. Philip Arestis & Ayşe Kaya & Hüseyin Şen, 2018. "Does fiscal consolidation promote economic growth and employment? Evidence from the PIIGGS countries," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 15(3), pages 289-312, November.

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