THE IMPACT OF FISCAL CONSOLIDATION POLICIES ON ECONOMIC PERFORMANCE
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Date
2020-01-20
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Department
School of Public Policy
Program
Public Policy
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This item may be protected under Title 17 of the U.S. Copyright Law. It is made available by UMBC for non-commercial research and education. For permission to publish or reproduce, please see http://aok.lib.umbc.edu/specoll/repro.php or contact Special Collections at speccoll(at)umbc.edu
This item may be protected under Title 17 of the U.S. Copyright Law. It is made available by UMBC for non-commercial research and education. For permission to publish or reproduce, please see http://aok.lib.umbc.edu/specoll/repro.php or contact Special Collections at speccoll(at)umbc.edu
Abstract
The U.S. Great Recession in 2007 contributed to the subsequent worldwide economic crisis and ensuing fiscal crises. As public debt rose dramatically, policymakers have attempted to counter this trend with a variety of austere fiscal policies. This dissertations assesses the results of fiscal consolidation policies with a focus on short-run economic performance and a comparison across time periods. Implementing a combination of yearly macroeconomic data and a variety of methods for measuring and identifying episodes of fiscal consolidation, fixed effects techniques are primarily used to analyze episodes between 1978 and 2019 to estimate the impact of fiscal consolidations on GDP, household consumption, and private investment within a select group of OECD countries. Across a variety of models, with updated data and unique variables, this dissertations confirms recent conclusions that fiscal consolidations generally have contractionary effects on GDP in the short-run, corroborated within its components. Results clarify that there are heterogeneous effects contingent upon policy construction. Policies primarily composed of taxation increases have contemporaneous and sustained contractionary effects; fiscal policies primarily composed of government spending reductions have average expansionary outcomes. The greater the gap between the size of spending portions of the plan and the size of taxation portions, the stronger the expansionary effect.
Further, current economic conditions and concurrent policies may notably influence outcomes. While growth in the level of indebtedness is shown to have no effect, the cost to acquire new debt is contractionary. Interestingly, more central bank independence tends to lead to negative outcomes, likely due to limitations on policy coordination. Higher short-term interest rates also lead to positive responses, yet inflation concerns are unfounded. The distinct economic conditions and monetary policies prevalent or enacted after the Great Recession have not uniformly impacted fiscal consolidation policies. Policies enacted amid a recession, however, perform better, especially if they are primarily composed of spending adjustments.
An inspection of individual countries confirms heterogeneity based on composition, offering little evidence that common regional economic characteristics or geographic proximity affect outcomes, while also negating the theory that the frequency of policy application may impact output.