Pressure or prudence? Tales of market pressure and fiscal adjustment

• Identifying determinants of discretionary fiscal consolidations based on a novel dataset.
• Fiscal consolidations are clustered around external shocks, and so are episodes of market pressure.
• Most countries that pursued large fiscal consolidations were not under direct market pressure.
• When countries do consolidate under market pressure, the median adjustment is significantly larger.
• Weak fundamentals are more commonly associated with large fiscal consolidations than market pressure.

We study whether multiyear fiscal adjustment plans in 17 OECD countries during 1980–2011 have been associated with market pressure. We find that only a fraction of the consolidations occurred under market pressure, suggesting that market pressure is important but not the main element associated with consolidation plans. Many adjustments under market pressure were also clustered around external shocks, and entailed larger median fiscal adjustments than other multiyear consolidations. In contrast, we find that virtually all multiyear consolidations aimed at reducing budget deficits occurred with initially weak macro-fiscal fundamentals.