Abstract graph and coins image

(Non-)Keynesian Effects of Fiscal Austerity: New Evidence from a Large Sample

Working Paper
| News

Using a large sample of 174 countries between 1970 and 2018, authors empirically assess whether a usually expected negative response of private consumption and private investment to a fiscal consolidation is reversed. They find that increases in government consumption have a Keynesian effect on real per capita private consumption; there is a positive effect of tax increases on private consumption when there is a fiscal consolidation; there is a crowding-in effect for private investment, from fiscal contractions; expansionary fiscal consolidations occur particularly in highly indebted advanced economies following an increase in taxes. The negative effect of taxation on private consumption is larger when an economy is experiencing a financial crisis, but it is not consolidating.