Expansionary fiscal consolidations in Europe: new evidence

Abstract

Using alternative approaches to determine fiscal episodes, I assess expansionary fiscal consolidations in Europe, via panel models for private consumption. There is some concurring evidence for several budgetary spending items while the asymmetric effects of fiscal episodes do not seem to be corroborated by the results.

Acknowledgements

I am grateful to José Marín, Jürgen von Hagen, and participants at the MMF 38th conference for helpful comments, and to Renate Dreiskena for assistance with the data. UECE is supported by FCT (Fundação para a Ciência e a Tecnologia, Portugal), financed by ERDF and Portuguese funds. The opinions expressed are those of the author and do not necessarily reflect those of the ECB or the Eurosystem.

Notes

¹ See Giavazzi and Pagano (1990), Bertola and Drazen (1993), McDermott and Wescott (1996), Alesina and Perotti (1997), Alesina and Ardagna (1998), Perotti (1998), Zaghini (2001), Hjelm (2002) and van Aarle and Garretsen (2003). von Hagen et al. (2001 and EC (2003) analyse case studies.

² As usual, here there is an element of arbitrariness. In this case, 1.5σ is 2.4 percentage points (pp) of GDP implying a more demanding threshold to determine a fiscal episode.

³ The cumulative change in the primary cyclically adjusted budget balance is at least 5, 4, 3 pp of GDP in respectively 4, 3 or 2 years, or 3 pp in 1 year.

⁴ The change in the primary cyclically adjusted budget balance is at least 2 pp of GDP in one ear or at least 1.5 pp on average in the last 2 years.

⁵ Data sources: European Commission AMECO database, and OECD national accounts. Common unit root tests reject the null of a unit root at least at the 5% level for all series in first differences.

Table 2. Fixed effects’ estimation results for specification (2), 1970–2005

⁶ In the presence of a fiscal consolidation episode, and if the previous period debt-to-GDP ratio was above some given debt ratio threshold, social transfers have a negative long-run effect on private consumption (Afonso, 2006).