The (non-)Keynesian effects of fiscal austerity: New evidence from a large sample |
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Affiliation: | 1. School of Economics and Management (ISEG), Research in Economics and Mathematics (REM), Research Unit on Complexity and Economics (UECE), Portugal;2. School of Economics and Management (ISEG), University Research in Economics and Mathematics (REM), Research Unit on Complexity and Economics (UECE), University of Lisbon, Portugal;3. Instituto Superior de Economia e Gestão (ISEG), University of Lisbon, Rua do Quelhas 6, 1200-781 Lisbon, Portugal;4. Research in Economics and Mathematics (REM) and Research Unit on Complexity and Economics (UECE), ISEG, University of Lisbon, Rua Miguel Lupi 20, 1249-078 Lisbon, Portugal;5. Economics for Policy and Centre for Globalization and Governance, Nova School of Business and Economics, Universidade Nova de Lisboa, Rua da Holanda 1, 2775-405 Carcavelos, Portugal;6. IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France |
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Abstract: | We empirically assess whether the negative response of private consumption and private investment to fiscal consolidation usually expected is reversed. We focus on a sample of 174 countries between 1970 and 2018 to determine episodes of fiscal consolidations using three alternative measures of the cyclically adjusted primary balance: (1) an International Monetary Fund (IMF)-World Economic Outlook (WEO) based measure, (2) a Hodrick-Prescott–based measure, and (3) a measure based on Hamilton (2018). We find that, first, increases in government consumption have a Keynesian effect on real per capita private consumption; second, tax increases have a positive effect on private consumption when a fiscal consolidation occurs; and, third, fiscal contraction has a crowding-in effect on private investment. Moreover, expansionary fiscal consolidations occur in highly indebted advanced economies, in particular, after an increase in taxes. We conclude that the negative effects of taxation on private consumption are larger when developing economies are experiencing a financial crisis and are not consolidating. |
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Keywords: | Consumption Endogeneity Filtering Financial crises Fiscal consolidation Investment Non-Keynesian effects Panel data |
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