The Long-run Effect of Fiscal Consolidation on Economic Growth: Evidence from Quantitative Case Studies

We contribute to the literature on the long-run effect of fiscal consolidation on economic growth by applying a novel method for quantitative case studies. Relying on a qualitative (narrative) definition of fiscal consolidations based on an examination of historical policy documents and using the synthetic control method (SCM), we investigate the evolution of post-consolidation trajectories of economic growth in six case studies of OECD countries. In contrast to recent studies that reject the hypothesis of non-Keynesian effects, our results do not offer clear-cut evidence on the long-run effect of fiscal consolidation on economic growth. Half of the case studies point to a positive effect with the other half indicating a negative effect. We further do not find a specific effect of the strength of the fiscal adjustment and the type of consolidation, i.e., whether the consolidation is rather based on expenditure cuts or revenue increases.

Kleis, Mischa and Marc-Daniel Moessinger (2016), The Long-run Effect of Fiscal Consolidation on Economic Growth: Evidence from Quantitative Case Studies, ZEW Discussion Paper No. 16-047, Mannheim.