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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 30, No. 1, pp.51-91
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2017
Received 03 May 2016 Revised 21 Jul 2016 Accepted 18 Aug 2016

Effects of Fiscal Consolidation in 18 OECD Countries

Kwang Jo Jeong
Kwang Jo Jeong, Head of the IMF Team, International Monetary System Division, Ministry of Strategy and Finance, South Korea, Tel: +82 44 215 4840, Fax: +82 44 215 8139 kwangjj1@naver.com

JEL Classification: E61, E62, H62, H63, H87

Abstract

This paper estimates the effects of fiscal consolidation on economic growth using panel datasets from 18 Organization for Economic Cooperation and Development (OECD) countries. The estimates of dynamic panel data Generalized Method of Moment (GMM) analysis show that fiscal consolidation is unlikely to be expansionary for GDP growth. Both Arellano-Bond difference GMM estimation and Blundell-Bond system GMM estimation suggest that fiscal consolidation exert negative effects on economic growth. Results do not support the expansionary fiscal consolidation hypothesis. In particular, our analyses find that fiscal consolidations during high debt-to-GDP ratios, based on spending cuts, or with high sovereign default risk exert less negative effects on economic growth than those during low debt-to-GDP ratios, based on tax hikes, or with low sovereign default risk.

Keywords:

Fiscal consolidation, Economic growth, Debt-to-GDP ratio, Sovereign default risk

Acknowledgments

I am grateful to Professor Soyoung Kim, Anonymous referees and Editorial Manager of SJE Jin-hee Choi for useful comments and suggestions.

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