Determinants and Effects of Fiscal Consolidations

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For a variety of reasons, fiscal consolidation is the order of the day in many industrialized and developing countries. The purpose of this research is to investigate the determinants, macroeconomic effects, political effects, and durability of fiscal consolidations. The project is organized around three main sets of issues. First, the macroeconomic effects of fiscal adjustments. Recent work in this area has shown that these are likely to depend on the composition of the adjustment. This issue is analyzed via a systematic investigation based on relatively unstructured vector auto regressions using both quarterly and annual data on 20 OECD countries. In addition, the role of policies such as monetary and exchange rate policies that have accompanied fiscal consolidations is investigated . Furthermore, this research will go deeper into the composition of consolidations by using a more refined breakdown than has been done so far. Second, the political consequences of consolidations. This is obviously an issue of primary importance. Hence, what happened to governments that consolidate is analyzed, with particular regard to the effects of spending cuts vs. tax increases. Third, the political determinants of consolidations, with particular regard to the notion of fragmentation of the executive and the role of budget institutions, both of which have played and important role in the theoretical literature are investigated in a systematic way. All these issues are investigated for OECD countries and US states and localities.