Larch, Martin and Turrini, Alessandro (2008): Received wisdom and beyond: Lessons from fiscal consolidations in the EU.
Download (586kB) | Preview
The paper examines consolidation episodes in the EU since 1970 with a view to shedding light on the factors that determine the success or failure of fiscal adjustment. Compared to the existing literature on successful fiscal consolidations we add a number of new dimensions. Three deserve particular attention. Firstly, we explore a broader set of potential ingredients of the recipe for success. In addition to the composition of adjustment, which has extensively been examined in the literature, we consider further elements such as the quality and strength of fiscal governance and the implementation of structural reforms. Secondly, our analysis seeks to differentiate between at least two different types of consolidation episodes, one in which a relatively big fiscal correction is implemented in a short period of time, dubbed 'cold shower' consolidation, as compared to more gradual episodes of adjustment. Thirdly, we check whether the 'recipe for success' changed over time. Our analysis broadly confirms the results established in the literature for what concerns (i) the conditions triggering a consolidation episode and (ii) the composition of adjustment, with minor but important qualifications related to the role played by government wages. In addition it provides evidence that well-designed fiscal governance as well as structural reforms improve the odds of both starting a consolidation episode and achieving a lasting fiscal correction. Our analysis also shows that the composition of successful and unsuccessful consolidation has become more similar over time and that other discriminating factors such as fiscal governance and structural reforms turn out to make an increasing difference for success.
|Item Type:||MPRA Paper|
|Original Title:||Received wisdom and beyond: Lessons from fiscal consolidations in the EU|
|Keywords:||Fiscal consolidations, fiscal rules, budgetary procedures, structural reforms|
|Subjects:||H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
|Depositing User:||Martin Larch|
|Date Deposited:||10. Feb 2010 11:48|
|Last Modified:||14. Feb 2013 07:46|
Alesina, A. and R. Perotti (1995) 'Fiscal expansions and fiscal adjustments in OECD countries', (NBER) Working Paper No. W5214.
Alesina, A. and R. Perotti (1996) 'Fiscal adjustment in the OECD countries: composition and macroeconomic effects', NBER Working Paper No 5730.
Alesina, A. and R. Perotti (1997), Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects, IMF Staff Papers, 44, 210-248.
Alesina, A. and R. Perotti (1999) ‘Budget Deficits and Budget Institutions’, in Poterba, J.M. and J. von Hagen, 'Fiscal institutions and fiscal performance', NBER, the University of Chicago Press.
Alesina, A. and S. Ardagna (1998) 'Tales of Fiscal Adjustment', Economic Policy, Vol. 13, No. 27, 487-545.
Alesina, A., R. Perotti, and J. Tavares (1998) 'The Political Economy of fiscal Adjustments', Brookings Papers on Economic Activity, Vol. 1, 197-266.
Ardagna, S. (2004) 'Fiscal Stabilizations: When Do They Work and Why?', European Economic Review, Vol. 48, No. 5, 1047-1074.
Ayuso-i-Casals J., D. G. Hernandez, L. Moulin, and A. Turrini (2006) 'Beyond the SGP – Features and effects of EU national-level fiscal rules', Prepared for the workshop organised by the European Commission on 'The role of national fiscal rules and institutions in shaping budgetary outcomes', 24 November 2006.
Bertelsmann Stiftung (2006) 'Erfolgreiche Budgetkonsolidierungen im Internationalen Vergleich', Gütersloh.
Blanchard, O. (1990) Suggestions for a new set of fiscal indicators, OECD Department of Economics and Statistics Working Paper No. 79.
Briotti, G. (2004) 'Fiscal Adjustment Between 1991 and 2002: Stylised Facts and Policy Implications', ECB Occasional Paper No. 9.
Debrun, X., L. Moulin, A. Turrini, J. Ayuso, and M. Kumar (2008), 'Tied to the mast? National fiscal rules in the European Union', Economic Policy, Vol. 23, No. 54, 297-362.
Deroose, S. and A. Turrini (2005) 'The Short-Term Budgetary Implications of Structural Reforms: Evidence from a Panel of EU Countries', CEPR Discussion Paper No. 5217.
European Commission, (2005a) Directorate-General for Economic and Financial Affairs, 'Public Finances in EMU – 2005', European Economy No. 3/2005.
European Commission, (2006a) Directorate-General for Economic and Financial Affairs, Public Finances in EMU - 2006, European Economy, No. 3/2006.
Forni, L. and S. Momigliano (2004) 'Cyclical Sensitivity of Fiscal Policies Based on Real-Time Data', Applied Economics Quarterly 3/2004, 299-326.
Giruoard, N. and R. Price (2004) Asset price cycles, 'one-off' factors and structural budget balance, OECD Economic Department Working Paper No. 391.
Jackman, R., C. Pissarides and S. Savouri (1990) Labour market Policies and unemployment in the OECD, Economic Policy, Vol. 5, No. 11, 449-490.
Hagen J. von, A. Hughes Hallett and R. Strauch (2002) 'Budgetary Consolidation in Europe: Quality, Economic Conditions and Persistence', Journal of the Japanese and International Economies, Vol. 16, No. 4, 512-535.
Hauptmeier, S., M. Heipertz and L. Schuhknecht (2006) 'Expenditure Reform in Industrialised Countries, A Case Study Approach', ECB Working Paper No. 634.
IMF, (2004) ' Euro Area Policies: Selected Issues', IMF Country Report No. 04/235, Washington DC.
Koen V. and P. van den Noord (2005) 'Fiscal Gimmickry in Europe: One-off Measures and Creative Accounting', Economics Department Working Paper No. 417.
Kopits, G. and S. Symansky (1998) Fiscal policy rules, IMF Occasional Papers No. 162.
Lambertini, L. and J. Tavares (2005) 'Exchange Rates and Fiscal Adjustments: Evidence from the OECD and Implications for the EMU', Contributions to Macroeconomics, Vol. 5, No. 1 Article 11.
Larch, M. and M. Salto (2005) 'Fiscal rules, inertia and discretionary fiscal policy', Applied Economics, 37, 1135-1146.
Mierau, J.O., R. Jong-A-Pin and J. de Haan (2007) 'Do political variables affect fiscal policy adjustment decisions?' New empirical evidence, Public Choice, 133: 297–319.
Zaghini, A. (1999) The economic policy of fiscal consolidations: the European experience, Banca d'Italia, Temi di discussione, No. 355.