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What determines the duration of a fiscal consolidation program?

Agnello, Luca, Castro, Vítor and Sousa, Ricardo (2013) What determines the duration of a fiscal consolidation program? Journal of International Money and Finance, 37. pp. 113-134. ISSN 0261-5606

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Identification Number: 10.1016/j.jimonfin.2013.05.012

Abstract

This paper assesses the determinants of the length of fiscal consolidation using annual data for 17 industrial countries over the period 1978-2009. Relying on a narrative approach to identify fiscal consolidation episodes, we show that fiscal variables (such as the budget deficit and the level of public debt) and economic factors (such as the degree of openness, the inflation rate, the interest rate and per capita GDP) are crucial for the fiscal consolidation process. Additionally, we employ duration analysis over a set of consolidation spells and find that, as time goes by, the likelihood of a fiscal consolidation ending is higher. However, the hazard function is not monotonic: indeed, it increases until the eighth or ninth year and starts decreasing afterwards. We also find that: (i) spending-driven consolidations are shorter than tax-driven consolidations; (ii) both types of consolidation are longer in Non-European countries than for European countries; and (iii) the size of the consolidation program (in percentage of GDP) does not significantly affect duration. All in all, our results support the importance of cuts in government spending as a way of bringing economies into a sustainable path for public debt. Moreover, they highlight the role played by a fiscal framework that imposes discipline in governments as a device to credibly shorten the length of fiscal consolidation episodes

Item Type: Article
Official URL: http://www.sciencedirect.com/science/journal/02615...
Additional Information: © 2013 Elsevier
Divisions: Financial Markets Group
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C41 - Duration Analysis
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
Sets: Collections > Economists Online
Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 02 Aug 2013 11:56
Last Modified: 20 Sep 2019 01:43
URI: http://eprints.lse.ac.uk/id/eprint/51342

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