Comparing Tax and Spending Multipliers: It's All About Controlling for Monetary Policy

Jalil, Andrew

doi:10.2139/ssrn.2139855

Cited by 6 publications

(3 citation statements)

References 25 publications

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“…Insert Figure 9 25 A similar analysis is conducted by Jalil (2012). This paper considers fiscal shocks rather than fiscal plans and finds that the tax multiplier is of about 3, while the spending multiplier is close to zero in countries where monetary authorities are constrained in their ability to counteract shocks because they are in either a monetary union or a liquidity trap.…”

Section: Non Eu Plus Europe Before Emumentioning

confidence: 73%

The output effect of fiscal consolidation plans

Alesina

Favero

Giavazzi

2015

Journal of International Economics

250

213

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The key question in estimating the effects of fiscal policy on output is how to identify shifts in fiscal policy that are "exogenous", that is are not a response to the state of output -as would be the case, for instance, of a fiscal expansion induced by a fall in output. Following the approach pioneered by Romer and Romer (2010), Devries at al (2011) have collected and described -using the records available in official documents -the multi-year fiscal consolidation plans announced (and then implemented or revised) by seventeen OECD countries over a quarter of a century . Among all stabilization plans these authors have selected those that were designed to reduce a budget deficit and to put the public debt on a sustainable path, which should guarantee their "exogeneity".Using the Devries et al (2011) data we have been able to make progress on question of anticipated versus unanticipated shifts in fiscal policy and permanent versus transitory shifts. We find that it matters crucially how the consolidation occurs. Fiscal adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. The difference is remarkable in its size and it cannot be explained by different monetary policies during the two types of adjustments. We find instead that the heterogeneity in the effects of the two types of fiscal adjustments is mainly due to the response of private investment, rather than that to consumption growth. Interestingly, the responses of business and consumers' confidence to different types of fiscal adjustment show the same asymmetry as investment and consumption: business confidence (unlike consumer confidence) picks up immediately after expenditure-based adjustments.The strength and the statistical significance of our results depend crucially on the innovative approach that we adopt to simulate the impact of fiscal adjustments. Rather than simulating the impact of exogenous fiscal shocks, we study the response of output (and of the other variables of interest) to multi-period fiscal consolidation plans -that is sequences of tax increases and spending cuts, announced in some year and then implemented or revised in subsequent years. We allow for differences in the "style" of these plans across countries, and we show that these differences are a critical factor in order to obtain more precise estimates of the response of the economy to a consolidation plan.The output effect of fiscal consolidation plans Alberto Alesina, Carlo Favero and Francesco Giavazzi * This version: October 2014 AbstractWe show that the correct experiment to evaluate the effects of a fiscal adjustment is the simulation of a multi year fiscal plan rather than of individual fiscal shocks. Simulation of fiscal plans adopted by 16 OECD countries over a 30-year period supports the hypothesis that the effects of consolidations depend on their design. Fiscal adjustments based upon spending cuts are much less costly, in terms of output losses, than tax-based ones and have especially low output costs when they consist...

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Section: Non Eu Plus Europe Before Emumentioning

confidence: 73%

The output effect of fiscal consolidation plans

Alesina

Favero

Giavazzi

2015

Journal of International Economics

250

213

View full text Add to dashboard Cite

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“…A similar analysis is conducted byJalil (2012). This paper considers fiscal shocks rather than fiscal plans and finds that the tax multiplier is of about 3, while the spending multiplier is close to zero in countries where monetary authorities are constrained in their ability to counteract shocks because they are in either a monetary union or a liquidity trap.26 In this estimation we have extended the sample to Sweden and Finland, the two countries which so far we had been excluded because of lack of some data.…”

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confidence: 87%

The Output Effect of Fiscal Consolidations

2012

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provided outstanding research assistance. This paper was initially funded as part of the Growth and Sustainability Policies for Europe project (GRASP #244725) by the European Commission's 7th Framework Programme. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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“…Another important interaction between fiscal and monetary policy is the fact that inflation can have a different impact, in terms of both size and timing, across different components of public expenditure and revenue. Jalil (2012) shows that the differences between the estimated multipliers of government spending and taxation can be explained by the differential response of monetary policy. Erceg and Lindé (2013) find that, at the ZLB, a tax-based consolidation is less costly in the short run than a spending-based consolidation, while the opposite is true when monetary policy is unconstrained.…”

Section: Bmentioning

confidence: 99%

Fiscal Consolidation in a Low Inflation Environment: Pay Cuts Versus Lost Jobs

et al. 2016

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We construct a model of a monetary union to study fiscal consolidation in the periphery of the euro area, through cuts in public-sector wages or hiring when the nominal interest rate is constrained at its lower bound. Consolidation induces a positive wealth effect that increases demand, as well as a reallocation of workers towards the private sector, which together boost private activity. However, in a low-inflation environment, demand is suppressed and the private sector is * We would like to thank the editor, L. Reichlin, and an anonymous referee for their comments, as well as A. Trigari for the insightful discussion. We are also grateful for comments to R. Wouters and other participants in the International Journal of Central Banking Research Conference 2017 and in the "Fiscal Policy after the Crisis" workshop organized by the European Commission. We would also like to thank A

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Comparing Tax and Spending Multipliers: It's All About Controlling for Monetary Policy

Cited by 6 publications

References 25 publications

The output effect of fiscal consolidation plans

The output effect of fiscal consolidation plans

The Output Effect of Fiscal Consolidations

Fiscal Consolidation in a Low Inflation Environment: Pay Cuts Versus Lost Jobs

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