Tales of fiscal adjustment

Abstract

"This paper examines the evidence on fiscal adjustments in OECD countries from the early 1960s to today. The results shed light on the recently observed phenomenon of fiscal tightening that produces (non-Keynesian) expansionary effects. One interpretation is that a serious fiscal tightening increases demand. Wealth rises when future tax burdens decline, and when interest rates decline credibility is restored and inflation or default risks abate. Both consumption and investment rise. For this effect to produce an expansion, the tightening must be sizeable and occur after a period of stress when the budget is quickly deteriorating and public debt is building up. Another interpretation emphasizes the supply side. Typically, a fiscal consolidation based on tax increases is short-lived. To be long lasting, it must include cuts in public employment, transfers and government wages. To be politically possible, such a policy must be supported by trade unions. These measures result in more efficient labour markets and boost the supply side. Based both on statistical evidence and on a detailed analysis of ten cases of major fiscal adjustment, this article provides cautious support to the supply-side view, without denying a more limited role for the demand-side channel." Copyright Centre for Economic Policy Research, Centre for Economic Studies, Maison des Sciences de l'Homme 1997.

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Tales of Fiscal AdjustmentTales of Fiscal Adjustment


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CitationCitation Alesina, Alberto and Silvia Ardagna. 1998. Tales of Fiscal
Adjustment. Economic Policy 13(27): 489-585.
Published VersionPublished Versiondoi:10.1111/1468-0327.00039
AccessedAccessedOctober 14, 2011 12:10:57 AM EDT
Citable LinkCitable Linkhttp://nrs.harvard.edu/urn-3:HUL.InstRepos:2579822
Terms of UseTerms of UseThis article was downloaded from Harvard University's DASH
repository, and is made available under the terms and conditions
applicable to Other Posted Material, as set forth at
http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-
use#LAA

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
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


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

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
         

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


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
           








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            
           





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



              

            


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
           
             




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
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
              


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



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





