Macroeconomic effects of fiscal adjustment: A tale of two approaches ¬リニ

We investigate the short-term effects of fiscal adjustment on economic activity in 20 OECD countries from 1970 to 2009.We compare two approaches: the traditional approach based on changes in cyclically adjusted primary balance (CAPB) and the narrative approach based on historical records. Proponents of the latter argue that it captures discretionary fiscal adjustment more accurately than the traditional approach.We propose a new definition of CAPB that takes account of fluctuations in asset prices and reflects idiosyncratic features of fiscal policy in individual countries. Using this new definition, we find that fiscal adjustments always have contractionary effects on economic activity in the short term; we find no evidence of expansionary (non-Keynesian) fiscal adjustments. Spending-based fiscal adjustments lead to smaller output losses than tax-based fiscal adjustment. These results are in line with the literature using the narrative approach, suggesting that the CAPB, when correctly specified, can be used as a measure of fiscal adjustments. © 2015 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY license (http:// creativecommons.org/licenses/by/4.0/). ☆ We benefited from comments and suggestions received from seminar and conference participants at Durham University, Slovak National Bank, Royal Economic Society conference 2014, CESifo Area Conference on Macro, Money and International Finance 2014, BMRC conference 2014 and the ZEW Public Finance Conference 2015. Weonho Yang’s research on this paper was supported by a partial PhD scholarship from the Ministry of Strategy and Finance of the Republic of Korea, whose generosity he would like to gratefully acknowledge. * Corresponding author. Tel.: +44 1895 266 528. E-mail address: [email protected]@fidrmuc.net or (J. Fidrmuc). http://dx.doi.org/10.1016/j.jimonfin.2015.05.003 0261-5606/© 2015 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY license (http:// creativecommons.org/licenses/by/4.0/). Journal of International Money and Finance 57 (2015) 31–60