Monday, November 23, 2009

New work on fiscal adjustments

Alberto Alesina and Silvia Ardagna offer a new look at fiscal adjustment --- namely, raising taxes or cutting spending in order to achieve it --- and GDP effects among OECD countries. This is related to the question about the size of fiscal multipliers, but the samples are likely to be quite different. You'd never in your right mind conduct fiscal adjustment to lower a deficit during a contraction ... or would you?

In the paper, which is forthcoming in Tax Policy and the Economy, Alesina and Ardagna find that cutting spending is less harmful than raising taxes, and reflexively, tax cuts are better for GDP than spending increases. I don't think they are able to measure the (perceived) degree of permanence of these policies, which presumably would matter for life-cycle consumers.