Fiscal consolidation plans : expansionary austerity in LAC?

Abstract

I evaluate the short-term effects of a fiscal consolidation on economic activity following a multi-year fiscal plan. Using an updated narrative database of exogenous fiscal plans adopted by 30 countries over a 41-year period, my findings suggest that the effects of fiscal consolidations on output growth depend on the design and country. Confirming previous literature, I find that fiscal adjustments in OECD countries are associated with output losses. Those based upon taxes are deep and long-lasting while expenditure-based ones are smaller on average and short-lived. By contrast, I find that consolidations in LAC support the hypothesis of expansionary austerity. Taxed-based consolidations have a positive effect on output after two years while those based upon spending cuts present no significant effect in the short term.