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Does uncertainty matter for the fiscal consolidation and investment nexus?

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  • Ioannis Bournakis
  • Nelson R. Ramírez-Rondán

Abstract

The paper searches for non-linearities in the relationship between fiscal consolidation and investment. To understand this nexus, we consider the broader state of the economy as this is represented by the degree of uncertainty. Based on a sample of 27 OECD countries over the period 1996-2019, we identify low and high uncertainty regimes within which the nature of the relationship between fiscal policy and investment differs substantially. In the low uncertainty regime, fiscal tightening has an irrelevant effect on investment; whereas, in the high uncertainty regime, this impact is negative and is three times larger than in the low uncertainty regime. Our findings maintain a robust pattern of this relationship through a series of sensitivity tests.

Suggested Citation

  • Ioannis Bournakis & Nelson R. Ramírez-Rondán, 2023. "Does uncertainty matter for the fiscal consolidation and investment nexus?," Working Papers 195, Peruvian Economic Association.
    • Handle: RePEc:apc:wpaper:195
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    More about this item

    Keywords

    Fiscal policy; real sector; threshold model; panel data;
    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
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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