The Long-run Effect of Fiscal Consolidation on Economic Growth: Evidence from Quantitative Case Studies

We contribute to the literature on the long-run effect of fiscal consolidation on eco- nomic growth by applying a novel method for quantitative case studies. Relying on a qualitative (narrative) definition of fiscal consolidations based on an examination of historical policy documents and using the synthetic control method (SCM), we inves- tigate the evolution of post-consolidation trajectories of economic growth in six case studies of OECD countries. In contrast to recent studies that reject the hypothesis of non-Keynesian effects, our results do not offer clear-cut evidence on the long-run effect of fiscal consolidation on economic growth. Half of the case studies point to a positive effect with the other half indicating a negative effect. We further do not find a specific effect of the strength of the fiscal adjustment and the type of consolidation, i.e., whether the consolidation is rather based on expenditure cuts or revenue increases.

Relevant posts

• Attinasi Grazia, Maria, Metelli, Luca, (2016), “Is fiscal consolidation self-defeating? A Panel-VAR analysis for the Euro area countries”, European Central Bank Working Paper, No. 1883, February
• Larch, Martin ,Malzubris, Janis, Santacroce,Stefano,(2016),”Fiscal Consolidation in Ireland: Recent Successes and Remaining Challenges”, Directorate-General for Economic and Financial Affairs/ European Economy Economic Brief 011, May