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Does uncertainty matter for the fiscal consolidation and capital intensity nexus?

Bournakis, Ioannis and Ramirez-Rondan, Nelson R. (2022): Does uncertainty matter for the fiscal consolidation and capital intensity nexus?

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Abstract

The paper looks for non-linearities in the relationship between fiscal consolidation and capital intensity (capital per worker). To understand this nexus, we consider the broader state of the economy as it is represented by the degree of economic uncertainty. Based on a sample of 27 OECD countries over the period 1996-2019, we identify low and high uncertainty regimes within which the nature of the relationship between fiscal policy and capital intensity differs substantially. In the low uncertainty regime, fiscal tightening is either irrelevant or has a relatively small negative economic effect on the evolution of capital intensity. In the high uncertainty regime, the negative effect of fiscal tightening on capital intensity can be three times bigger in comparison to the effect in the low uncertainty regime. Our findings maintain a robust pattern of this relationship through a series of sensitivity tests.

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