Total factor productivity (TFP) and fiscal consolidation: How harmful is austerity?

Bardaka, Ioanna and Bournakis, Ioannis and Kaplanoglou, Georgia (2020): Total factor productivity (TFP) and fiscal consolidation: How harmful is austerity? Forthcoming in: Economic Modelling (20 February 2020)

Abstract

Departing from the expansionary austerity literature, this study assesses empirically whether fiscal consolidation propagates changes in the supply side of the economy that can potentially influence total factor productivity (TFP). Using a panel dataset of 26 OECD countries over the period 1980–2016 and employing panel vector autoregressive and panel cointegration techniques, we present evidence of both short-run and long-run negative effects of fiscal consolidation on TFP. The short-run impact is disproportionately more damaging for the TFP of low debt countries, while, contrary to the expansionary austerity thesis, our empirical results would advise against spending-driven fiscal consolidation, since such consolidation undermines capacity, due to the importance of government spending in shaping productive capital. Our results have serious policy implications for the implementation and design of fiscal adjustment programmes.

• Item Type: MPRA Paper
• Language: English
• Keywords: Total factor productivity, Fiscal consolidation, OECD countries, Austerity, Growth
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H6 - National Budget, Deficit, and Debt > H68 - Forecasts of Budgets, Deficits, and Debt

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