Friday, August 24, 2012

The government's budget deficit?


This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. 

Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions. The difference cannot be explained by different monetary policies during the two types of
adjustments.

All American Investor

Continue reading -- The output effect of fiscal consolidations

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Original content Bob DeMarco, All American Investor