(Non-)Keynesian Effects of Fiscal Austerity: New Evidence from a Large Sample

Abstract

We empirically assess whether a usually expected negative response of private consumption and private investment to a fiscal consolidation is reversed. We focus on a large sample of 174 countries between 1970 and 2018. We also employ three alternative measures of the Cyclically Adjusted Primary Balance used to determine fiscal episodes: i) the IMF-WEO based; ii) the HP-based; and iii) the Hamilton (2018)-based. We find that: i) increases in government consumption have a Keynesian effect on real per capita private consumption; ii) there is a positive effect of tax increases on private consumption when there is a fiscal consolidation; iii) there is a crowding-in effect for private investment, from fiscal contractions. Moreover, expansionary fiscal consolidations occur particularly in highly indebted advanced economies following an increase in taxes. Finally, the negative effect of taxation on private consumption is larger when an economy is experiencing a financial crisis but it is not consolidating.

Run Effects of the Short-Run Stabilization Policies in Ukraine

“…Contrary to abovementioned studies, there is no evidence of significant output response to budget revenues. It seems that non-Keynesian effects of fiscal policy in Ukraine refer to government expenditure cuts, not revenue increases, as it is obtained for a large sample of countries by Afonso et al [2022].…”

“…As argued by the adherents of structuralist theories in the developing countries, any demand restraint leads mainly to a drop in domestic output in the short run, which in turn can discourage investment and thus reduce the economy's long-run output [Crockett 1981]. Further complications are caused by the so-called non-Keynesian fiscal policy effects when fiscal austerity becomes expansionary, as suggested by Afonso, Alves, and Jalles [2022], or the price puzzle when an increase in the central bank interest rate is associated with a higher inflation rate [Sims 1992].…”

To consolidate or not to consolidate? A multi-step analysis to assess needed fiscal sustainability

“…1 According to these authors a fiscal consolidation episode is defined as a minimum annual improvement in the CAPB-to-GDP ratio of 0.5 pp over two consecutive years. 2 The data, presented in Tables 1 and 2, comes from a recent paper (Afonso et al, 2021). All in all,…”

“…(𝛽 𝑡−1 * 𝐷𝑖𝑑 𝑡 ) + 𝛾 3 . 𝐷𝑒𝑏𝑡 𝑡−1 + 𝜖 𝑡 (3) where  was estimated in (1), Need and Did are dummy variables that take the value of one if a given economy needed or did a fiscal consolidation in a given year as described above, while…”

“…Notwithstanding the relevance of fiscal policy sustainability, analyses on the so-called expansionary fiscal consolidations has received much attention. The macroeconomic effects of such fiscal consolidations, related with the notion of non-Keynesian effects, are well described in the literature (see, for instance, von Hagen and Strauch, 2001, van Aarle and Garretsen, 2003, Giudice et al, 2007, Alesina et al, 2015, Alesina et al, 2019, Afonso and Leal, 2020, Afonso et al, 2021. In addition to looking at the non-Keynesian effects, the literature has devoted time and effort to identify fiscal episodes, i.e., periods when the change in the cyclically adjusted primary balance is greater than an ad-hoc positive threshold value (contractionary "discretionary" fiscal policy) or lower than a negative threshold value (expansionary "discretionary" fiscal policy).…”