Expansionary Fiscal Austerity : New International Evidence

The expansionary fiscal contraction (EFC) hypothesis states that fiscal austerity can increase output or consumption when a country is under heavy debt burdens because it sends positive signal about the country's solvency situation and long-te...

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Main Author:	Nie, Ou
Format:	Working Paper
Language:	English
Published:	World Bank, Washington, DC 2020
Subjects:	FISCAL POLICY FISCAL CONSOLIDATION STRUCTURAL VECTOR AUTOREGRESSION DEBT SUSTAINABILITY ECONOMIC CRISIS FISCAL SHOCK ECONOMIC SHOCK AUSTERITY DEBT BURDEN
Online Access:	http://documents.worldbank.org/curated/en/430691596113581519/Expansionary-Fiscal-Austerity-New-International-Evidence http://hdl.handle.net/10986/34262

id	okr-10986-34262
recordtype	oai_dc
spelling	okr-10986-342622022-09-20T00:11:18Z Expansionary Fiscal Austerity : New International Evidence Nie, Ou FISCAL POLICY FISCAL CONSOLIDATION STRUCTURAL VECTOR AUTOREGRESSION DEBT SUSTAINABILITY ECONOMIC CRISIS FISCAL SHOCK ECONOMIC SHOCK AUSTERITY DEBT BURDEN The expansionary fiscal contraction (EFC) hypothesis states that fiscal austerity can increase output or consumption when a country is under heavy debt burdens because it sends positive signal about the country's solvency situation and long-term economic wellbeing. Empirical tests of this hypothesis have suffered from identification concerns due to data sources and empirical methodology. Using a sample of OECD countries between 1978 and 2014, this paper combines new IMF narrative data and the proxy structural Vector Auto-regression (SVAR) method to examine whether fiscal austerities can be expansionary when debt levels are high. Fiscal austerities are measured as 1) narrative fiscal shocks and 2) structural shocks from a proxy SVAR. Additionally, this paper uses a model-based approach to determine the cutoff debt level beyond which EFC is expected to be observed. This paper finds empirical evidence in support of the EFC hypothesis for OECD countries: results for output are driven by changes in tax rates and are robust to how one defines a high-debt regime and how one measures austerity. 2020-07-30T16:53:41Z 2020-07-30T16:53:41Z 2020-07 Working Paper http://documents.worldbank.org/curated/en/430691596113581519/Expansionary-Fiscal-Austerity-New-International-Evidence http://hdl.handle.net/10986/34262 English Policy Research Working Paper;No. 9344 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	FISCAL POLICY FISCAL CONSOLIDATION STRUCTURAL VECTOR AUTOREGRESSION DEBT SUSTAINABILITY ECONOMIC CRISIS FISCAL SHOCK ECONOMIC SHOCK AUSTERITY DEBT BURDEN
spellingShingle	FISCAL POLICY FISCAL CONSOLIDATION STRUCTURAL VECTOR AUTOREGRESSION DEBT SUSTAINABILITY ECONOMIC CRISIS FISCAL SHOCK ECONOMIC SHOCK AUSTERITY DEBT BURDEN Nie, Ou Expansionary Fiscal Austerity : New International Evidence
relation	Policy Research Working Paper;No. 9344
description	The expansionary fiscal contraction (EFC) hypothesis states that fiscal austerity can increase output or consumption when a country is under heavy debt burdens because it sends positive signal about the country's solvency situation and long-term economic wellbeing. Empirical tests of this hypothesis have suffered from identification concerns due to data sources and empirical methodology. Using a sample of OECD countries between 1978 and 2014, this paper combines new IMF narrative data and the proxy structural Vector Auto-regression (SVAR) method to examine whether fiscal austerities can be expansionary when debt levels are high. Fiscal austerities are measured as 1) narrative fiscal shocks and 2) structural shocks from a proxy SVAR. Additionally, this paper uses a model-based approach to determine the cutoff debt level beyond which EFC is expected to be observed. This paper finds empirical evidence in support of the EFC hypothesis for OECD countries: results for output are driven by changes in tax rates and are robust to how one defines a high-debt regime and how one measures austerity.
format	Working Paper
author	Nie, Ou
author_facet	Nie, Ou
author_sort	Nie, Ou
title	Expansionary Fiscal Austerity : New International Evidence
title_short	Expansionary Fiscal Austerity : New International Evidence
title_full	Expansionary Fiscal Austerity : New International Evidence
title_fullStr	Expansionary Fiscal Austerity : New International Evidence
title_full_unstemmed	Expansionary Fiscal Austerity : New International Evidence
title_sort	expansionary fiscal austerity : new international evidence
publisher	World Bank, Washington, DC
publishDate	2020
url	http://documents.worldbank.org/curated/en/430691596113581519/Expansionary-Fiscal-Austerity-New-International-Evidence http://hdl.handle.net/10986/34262
_version_	1764480527424815104

Expansionary Fiscal Austerity : New International Evidence

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