Fiscal consolidation and macroeconomic outcomes

Rapti, Chrysanthi (2020) Fiscal consolidation and macroeconomic outcomes. Doctoral thesis, Birkbeck, University of London.

Abstract

This Thesis examines fiscal consolidation effects on unemployment and the labour market, focusing on differentiated outcomes based on austerity type and country specific labour market institutions. It also investigates how associated fiscal austerity is with the current account to examine international implications of austerity. The First Chapter empirically investigates short-run and long-run effects of different austerity measures on unemployment, real wages, labour force participation, and hours worked in a panel of European countries. Unemployment significantly increases due to fiscal consolidation shocks, with spending oriented adjustment having significant effects both in the short-run and long-run. Labour force participation significantly decreases due to spending cuts while real wages fall in the long-run, although non-significantly, responding to increased taxation. The Second Chapter examines how labour market structure can affect the transmission of fiscal consolidation to unemployment and labour market, by studying heterogeneous responses of unemployment to austerity across European countries. The analysis is based on theoretical and empirical models, i.e. a Dynamic Stochastic General Equilibrium model featured by frictional labour market with employment protection and a hierarchical Bayesian panel model encompassing differences in labour market institutions. Cutting spending increases cyclical unemployment by more as compared to tax hikes. Spending effect is stronger for total unemployment on impact, while the response of total unemployment to either spending or tax based adjustment is similar in the long-run. Labour market institutions can affect fiscal transmission to unemployment, with higher employment protection inducing stronger effects. The Third Chapter empirically studies open-economy effects of austerity, by examining the relationship between government budget and current account balances in the UK after fiscal intervention, using Structural Vector Autoregression models. The results did not support the twin deficits hypothesis. Positive shocks in government budget balance and tax revenues induce real exchange appreciation but current account does not appear to significantly respond.

Metadata

Statistics

DownloadsShow export options

Export as XMLJSONCSV

Activity Overview

6 month trend

17Downloads

6 month trend

24Hits

Additional statistics are available via IRStats2.

Archive Staff Only (login required)

Edit/View Item