Assessing fiscal episodes

In an OCDE panel, for the period 1970-2010, we assess the effects of fiscal consolidation episodes, with four different definitions. Our results reveal that lower final government consumption increases private consumption in three out of the four approaches, when a fiscal consolidation occurs, and the debt ratio is above the cross-country average. The magnitude of these coefficients is higher for countries with lower debt levels, implying more successful consolidations associated with reduced crowding-out effects. There is some evidence of non-Keynesian effects for both private consumption and private investment, and the effects of social transfers on private investment tend to be negative, both in the short and long run. In a financial crisis, such effects are also more prone to happen. Finally, raising long-term interest rates reduces per capita private investment.