VOX
November 12, 2010
Many nations are in the middle of painful fiscal retrenchments. This column presents recent research on the impacts of these policies. It argues that spending cuts are less recessionary than tax increases when deficits are reduced and responds to criticisms of these findings in the recent IMF World Economic Outlook.
Many European countries are engaged in large fiscal adjustments. The standard Keynesian view is that these adjustments will cause deep recessions especially if they occur on the spending side (see for example Krugman 2010). A lively literature initiated by a paper by Giavazzi and Pagano (1990) has uncovered “non-Keynesian” effects of large fiscal adjustments. The latest instalment of this line of research is a paper that I co-authored with Silvia Ardagna (Alesina and Ardagna 2010).
This literature reaches three conclusions.
First, fiscal adjustments on the spending side are more likely to lead to a permanent stabilisation of the budget.
Second adjustments on the spending side have lower cost in terms of lost output.
Third, some, not all, adjustments on the spending side are not followed by a downturn even on impact.
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Read the Paper
See also this and this
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