# Action-Based Fiscal Consolidations and Economic Growth

## Abstract

**:**

## 1. Introduction

## 2. Related Literature

## 3. Data and Estimation Framework for: Are Action-Based Fiscal Consolidations Exogenous?

#### 3.1. Data

#### 3.1.1. Action-Based Fiscal Consolidations

“We examine policymakers’ intentions and actions as described in contemporaneous policy documents, and identify measures motivated primarily by deficit reduction…Following Romer and Romer (2010), we use the contemporaneous estimates contained in these sources since retrospective estimates are rarely available.”

#### 3.1.2. Exogenous Variables

#### 3.1.3. Descriptive Statistics

#### 3.2. Estimation Framework

_{it}= a

_{i}+ b

_{t}+ αZ

_{it}+ u

_{it}

_{i}and b

_{t}, respectively. Z are variables that are exogenous to fiscal consolidations. In Equation (1), rejecting the null hypothesis that α = 0 means that the IMF’s action-based fiscal consolidations are unlikely to be exogenous.

_{it}= c

_{i}+ b

_{t}+ β*Z

_{it}+ e

_{it}

## 4. Empirical Results for: Are Action-Based Fiscal Consolidations Exogenous?

#### 4.1. Contemporaneous Effects of Temperature Changes

#### 4.2. Contemporaneous Effects of GDP Growth of Trading Partners

#### 4.3. Contemporaneous Effects of an International Commodity Price Index

## 5. Estimation Framework: Identification of a Simultaneous System of Two Equations

- (1)
- FiscalConsolidation = αGDPGrowth + u,
- (2)
- GDPGrowth = β*FiscalConsolidation + e,

- (I)
- β
^{LS}= β + cov(FiscalConsolidation,u) = β + α(1 − α β)^{−1}σ^{2}(e)/σ^{2}(F),

^{2}(e) is the variance of the error term e and σ

^{2}(F) is the variance of fiscal consolidations. Hence, only if α is equal to zero does the least squares estimation of Equation (2) yield a consistent estimate of β.

- (2’)
- GDPGrowth = β*FiscalConsolidation + φZ + e’

_{res}= FiscalConsolidation − α

^{hat,IV}GDPGrowth. Then, u

_{res}is used as an instrument for fiscal consolidations in Equation (2). This yields the following instrumental variables’ estimator:

- (II)
- β
^{IV}= cov(u_{res},GDPGrowth)/cov(u_{res},FiscalConsolidation)= β + cov(u_{res},e)/cov(u_{res},FiscalConsolidation)= β + cov(u,e)/cov(u,FiscalConsolidation)= β

^{hat,IV}= α, and hence u

_{res}= u. The last line follows from the assumption that cov(u,e) = 0. This is the same assumption that I made to derive the OLS estimator in Equation (I).

^{hat,LS}≠ α, from which it follows that u’

_{res}= FiscalConsolidation − α

^{hat,LS}GDPGrowth ≠ u, and thus cov(u’

_{res}, e) ≠ 0.

## 6. Instrumental Variables’ Estimates of the Simultaneous System of Equations

#### 6.1. The Contemporaneous Effect of GDP Growth on Fiscal Consolidations

#### 6.1.1. Overidentified Model

#### 6.1.2. Just-Identified Model

#### 6.1.3. Tests for Direct Effects of the Instruments on Fiscal Consolidations

#### 6.1.4. A Dynamic Simultaneous System of Equations

- (1)
- FiscalConsolidation
_{it}= a_{i}+ b_{t}+ αGDPGrowth_{it}+ Γ_{1}X_{it}_{−1}+ Γ_{2}X_{it}_{−2}+ u_{it} - (2)
- GDPGrowth
_{it}= c_{i}+ d_{t}+ βFiscalConsolidation_{it}+ Π_{1}X_{it}_{−1}+ Π_{1}X_{it}_{−2}+ ΘZ_{it}+ e_{it}

_{it}

_{−1}and X

_{it}

_{−2}are vectors that include GDP growth and fiscal consolidations in years t − 1 and t − 2, respectively. Z are the same instrumental variables for GDP growth as in Section 6.1.1.

_{it−1}and X

_{it−2}as controls means that the estimated coefficients β and α are the effects of “shocks”. Throughout their papers, Guajardo et al. (2014) and Carrière-Swallow et al. (2021) used the term “fiscal consolidation shocks”. The term fiscal consolidation shock simply means that the innovation in the fiscal consolidation variable in year t is not forecastable by past events. As such, a fiscal consolidation shock is not necessarily exogenous to contemporaneous GDP growth, although that was the assumption made in previous literature that estimated the effects of fiscal consolidations on GDP growth using the IMF’s data on action-based fiscal consolidations. That is, literature that used the IMF’s fiscal consolidation variable estimated Equation (2) by OLS, assuming that, in Equation (1), α = 0. If in the dynamic model specified above α ≠ 0, then OLS of Equation (2) yields an inconsistent estimate of β. If α < 0, then β

^{OLS}< β.

#### 6.1.5. Integral Multipliers

- (1)
- FiscalConsolidation(h)
_{it}= a_{i}+ b_{t}+ α^{h}GDPGrowth(h)_{it}+ Γ_{1}X_{it}_{−1}+ Γ_{2}X_{it}_{−2}+ u_{it} - (2)
- GDPGrowth(h)
_{it}= c_{i}+ d_{t}+ β^{h}FiscalConsolidation(h)_{it}+ Π_{1}X_{it}_{−1}+ Π_{1}X_{it}_{−2}+ ΘZ(h)_{it}+ e_{it}

_{it}is defined as the change in the log of GDP between years t + h and t − 1, i.e., logGDP

_{it+h}− logGDP

_{it−1}, and FiscalConsolidation(h)

_{it}is the sum of fiscal consolidations between years t + h and t. X

_{it}

_{−1}and X

_{it}

_{−2}are vectors that include GDP growth and fiscal consolidations in years t − 1 and t − 2, respectively. Z(h)

_{it}is a vector that includes the sum of each instrument between years t + h and t − 1. The coefficient α

^{h}is the cumulative effect of GDP growth over h years on the sum of fiscal consolidations over h years. The cumulative effect of the sum of fiscal consolidations over h years on GDP growth over h years is β

^{h}.

^{h}is negative for all horizons: h = 0, 1, 2. Column (1) of Table 8 shows the effect of GDP growth on fiscal consolidations for h = 0 (note that this is just a replication of column (1) of Table 7). Column (2) shows the effect of GDP growth on fiscal consolidations for h = 1, and column (3) shows the effect for h = 2. Thus, one can reject the null hypothesis that the coefficient on GDPgrowth(h) is equal to zero at the 1 percent significance level for h = 0, 1, and 2.

- i.
- For h = 0, a one standard deviation (equivalent to 4.2) increase in contemporaneous GDP growth over a horizon of one year reduces the magnitude of a fiscal consolidation over a horizon of one year by about 0.3 percent of GDP. This is equivalent to about 0.5 standard deviations.
- ii.
- For h = 1, a one standard deviation (equivalent to 7.2) increase in contemporaneous GDP growth over a horizon of two years reduces the magnitude of a fiscal consolidation over a horizon of two years by 0.5 percent of GDP. This is equivalent to about 0.4 standard deviations.
- iii.
- For h = 2, a one standard deviation (equivalent to 9.5) increase in contemporaneous GDP growth over a horizon of three years reduces the magnitude of a fiscal consolidation over a horizon of three years by 0.7 percent of GDP. This is equivalent to about 0.5 standard deviations.

#### 6.2. The Response of GDP Growth to Fiscal Consolidations

^{h}from OLS estimations of Equation (2). The identifying assumption that previous literature made is that α

^{h}= 0 for all h. A necessary condition for OLS to yield consistent estimates of β

^{h}is that in the simultaneous system of equations, α

^{h}= 0. The instrumental variables’ estimates in Table 8 showed that α

^{h}is negative for all horizons, h = 0, 1, and 2. Hence, OLS estimation of Equation (2) yields responses of GDP growth (cumulated over horizon h) to fiscal consolidation shocks (cumulated over horizon h) that are downward-biased for all h.6

^{res}= Fiscalconsolidation(h) − α

^{h,IV}GDPGrowth(h), where α

^{h,IV}is the instrumental variables’ estimate of the coefficient on GDPGrowth(h) from Table 8. As shown in Section 4, this instrumental variables strategy is immune to the downward bias that arises in OLS estimation of Equation (2) due to α

^{h}< 0.

^{h}are negative. This means that OLS regressions suggest that fiscal consolidations reduce GDP growth. Specifically, according to the OLS estimates in columns (1)–(3) of Table 9, a fiscal consolidation equal to 1 percent of GDP decreases GDP by about 0.44 percent over a horizon of 1 year (h = 0), while over a horizon of two years (h = 1) and three years (h = 2), GDP decreases by about 0.57 and 0.74 percent, respectively. This is the same result as in previous literature that used OLS to estimate Equation (2). However, as argued above, OLS estimates of the response of GDP growth to action-based fiscal consolidations are downward-biased.

^{h}and their 95 confidence bands. The figure visualizes the results of columns (1)–(3) of Table 9. Recall that the coefficient β

^{h}is the integral multiplier at horizon h, i.e., the ratio of the cumulative change in GDP over the cumulative change in fiscal consolidations. From Figure 1, one can see that the 2SLS estimates of the integral multipliers are positive, while the OLS estimates are negative. OLS and 2SLS estimates of β

^{h}are significantly different. For h = 0, 1, and 2, the 95 percent confidence bands around the OLS and 2SLS estimates of β

^{h}are non-overlapping. The Hausman test rejects the null hypothesis that OLS and 2SLS estimates of β

^{h}are the same, for h = 0, 1, and 2, at the 1 percent level.

#### 6.3. Mechanisms

## 7. Conclusions

## Supplementary Materials

## Funding

## Data Availability Statement

## Conflicts of Interest

## Appendix A

Variable | Source | Mean | Std. Dev. | Obs. |
---|---|---|---|---|

Fiscal Consolidation | DeVries et al. (2011); David and Leigh (2018) | 0.32 | 0.74 | 1016 |

Tax-based | DeVries et al. (2011); David and Leigh (2018) | 0.15 | 0.44 | 984 |

Expenditure-based | DeVries et al. (2011); David and Leigh (2018) | 0.16 | 0.44 | 984 |

Temperature Change | FAOSTAT (2021) | 0.68 | 0.6 | 994 |

Temperature Change | Dell et al. (2012) | 0.03 | 0.65 | 745 |

GDP Growth of Trading Partners | Vegh and Vulletin (2015) | 0.66 | 0.51 | 913 |

Commodity Price Index | Vegh and Vulletin (2015) | 0.83 | 3.62 | 908 |

Commodity Price Index | Gruss and Kebhaj (2019) | 100.5 | 3.99 | 995 |

Terms of Trade | World Bank (2021) | 99.6 | 18.5 | 1012 |

GDP Growth | PWT version 10.0 | 3.41 | 4.24 | 1016 |

Total Factor Productivity Growth | PWT version 10.0 | 0.39 | 2.11 | 1016 |

Investment Growth | PWT version 10.0 | 3.46 | 10.7 | 1016 |

Consumption Growth | PWT version 10.0 | 3.31 | 3.75 | 1016 |

Change in GDP Share of Net-Exports | PWT version 10.0 | −0.02 | 3.27 | 1016 |

Inflation | PWT version 10.0 | 2.82 | 10.15 | 1016 |

Real Effective Exchange Rate Growth | World Bank (2021) | −0.08 | 617 | 836 |

GDP Share of Tax Revenues | Vegh and Vulletin (2015) | 21.8 | 8.8 | 793 |

GDP Share of Government Expenditures | PWT version 10.0 | 16 | 4.3 | 1016 |

## Notes

1 | For temperature, examples of papers that document a significant effect on GDP growth are Dell et al. (2012), Burke et al. (2015), and Gallic and Vermandel (2020). In IV estimations of the contemporaneous effects of annual GDP growth on tax rates, Vegh and Vulletin (2015) showed that GDP growth of trading partners and an international commodity price index are relevant instruments for GDP growth. There are many other papers that have documented a significant effect of these variables on GDP, such as Kose (2002), Acemoglu et al. (2008), Brueckner et al. (2012), and Fernandez et al. (2017). |

2 | The narrative approach was pioneered by Friedman and Schwartz (1963) and has since been applied to monetary policy, fiscal policy, and macroprudential policy. See Ramey (2016) for a discussion of recent papers that have applied a narrative approach to various types of economic policy. |

3 | See https://ideas.repec.org/r/imf/imfwpa/2011-128.html (accessed on 15 January 2024). |

4 | For more details on how these variables are constructed and justification for why they are exogenous to GDP growth, see page 351 of Vegh and Vulletin (2015). |

5 | Vegh and Vulletin (2015) also used the US real interest rate as an instrument for GDP growth. I do not report results for the US real interest rate because my panel models include time fixed effects. The US real interest rate is perfectly collinear with the time fixed effects. I have estimated panel models without time fixed effects and included the US real interest rate on the right-hand side. I found a significant positive effect of the US real interest rate on the magnitude of action-based fiscal consolidations in the sample that excludes the US economy: a one percentage point increase in the US real interest rate in year t increases the magnitude of an action-based fiscal consolidation by about 0.03 percent of GDP. |

6 | Carrière-Swallow et al. (2021) included, in addition to the first and second lags of GDP growth and fiscal consolidations, current and lagged values of a commodity price index. Carrière-Swallow et al. (2021) did not include temperature changes or GDP growth of trading partners in Equation (2). Note that even with a commodity price index as a control variable in Equation (2), OLS of Equation (2) still yields a downward-biased estimate of β ^{h} if, in Equation (1), α^{h} < 0. |

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**Figure 1.**Estimated effect of a 1% of GDP fiscal consolidation on real GDP. Note: The figure shows estimates of the coefficient β

^{h}in Equation (2). The letter h in the superscript refers to the horizon, in years. The solid lines in the above figure are the β

^{h}coefficients obtained from instrumental variables’ regressions. The thick, long-dash-dotted lines are the β

^{h}coefficients obtained from ordinary least squares regressions. The thin, tight-dotted lines are the 95% confidence bands.

**Table 1.**Contemporaneous effects of temperature changes on action-based fiscal consolidations and GDP growth.

Fiscal Consolidation | Fiscal Consolidation | GDP | GDP | |
---|---|---|---|---|

Growth | Growth | |||

(1) | (2) | (3) | (4) | |

Whole Sample | Excluding Large Economies | Whole Sample | Excluding Large Economies | |

Temperature Change, t | −0.07 ** (0.04) | −0.10 ** (0.04) | 0.71 *** (0.2) | 0.75 *** (0.22) |

Country Fixed Effects | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes |

Observations | 986 | 805 | 986 | 805 |

Countries | 31 | 26 | 31 | 26 |

**Table 2.**Contemporaneous effects of GDP growth of trading partners on action-based fiscal consolidations and GDP growth.

Fiscal Consolidation | Fiscal Consolidation | GDP Growth | GDP Growth | |
---|---|---|---|---|

(1) | (2) | (3) | (4) | |

Whole Sample | Excluding Large Economies | Whole Sample | Excluding Large Economies | |

GDP Growth of Trading Partners, t | −0.25 *** (0.08) | −0.25 *** (0.09) | 2.65 *** (0.45) | 2.61 *** (0.46) |

Country Fixed Effects | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes |

Observations | 913 | 733 | 913 | 733 |

Countries | 30 | 25 | 30 | 25 |

**Table 3.**Contemporaneous effects of an international commodity price index on action-based fiscal consolidations and GDP growth.

Fiscal Consolidation | Fiscal Consolidation | GDP Growth | GDP Growth | |
---|---|---|---|---|

(1) | (2) | (3) | (4) | |

Whole Sample | Excluding Large Economies | Whole Sample | Excluding Large Economies | |

Commodity Price Index, t | −0.02 ** (0.01) | −0.02 ** (0.01) | 0.20 *** (0.06) | 0.18 *** (0.07) |

Country Fixed Effects | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes |

Observations | 908 | 728 | 908 | 728 |

Countries | 30 | 25 | 30 | 25 |

Fiscal Consolidation (Tax and Expenditure) | Fiscal Consolidation (Tax and Expenditure) | Fiscal Consolidation (Tax) | Fiscal Consolidation (Tax) | Fiscal Consolidation (Expenditure) | Fiscal Consolidation (Expenditure) | |
---|---|---|---|---|---|---|

(1) | (2) | (3) | (4) | (5) | (6) | |

Whole Sample | Excluding Large Economies | Whole Sample | Excluding Large Economies | Whole Sample | Excluding Large Economies | |

GDP Growth, t | −0.07 ** (0.02) | −0.08 *** (0.03) | −0.05 ** (0.02) | −0.05 ** (0.02) | −0.03 ** (0.01) | −0.03 * (0.02) |

Cragg–Donald F-Stat | 19.7 | 13.9 | 19.7 | 13.9 | 19.7 | 13.9 |

Kleibergen–Paap F-Stat | 17 | 13.7 | 17 | 13.7 | 17 | 13.7 |

Hansen J, p-value | 0.99 | 0.75 | 0.87 | 0.79 | 0.63 | 0.37 |

First-Stage Estimates for GDP Growth, t | ||||||

GDP Growth of Trading Partners, t | 2.21 *** (0.51) | 2.13 *** (0.52) | 2.21 *** (0.51) | 2.13 *** (0.52) | 2.21 *** (0.51) | 2.13 *** (0.52) |

Commodity Price Index, t | 0.17 ** (0.07) | 0.14 * (0.07) | 0.17 ** (0.07) | 0.14 * (0.07) | 0.17 ** (0.07) | 0.14 * (0.07) |

Temperature Change, t | 0.71 *** (0.22) | 0.71 *** (0.26) | 0.71 *** (0.22) | 0.71 *** (0.26) | 0.71 *** (0.22) | 0.71 *** (0.26) |

Country Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Observations | 850 | 670 | 850 | 670 | 850 | 670 |

Countries | 29 | 24 | 29 | 24 | 29 | 24 |

**Table 5.**Contemporaneous effects of GDP growth on action-based fiscal consolidations (two-stage least squares with one instrument for GDP growth).

Fiscal Consolidation | ||||||
---|---|---|---|---|---|---|

(1) | (2) | (3) | (4) | (5) | (6) | |

Whole Sample | Excluding Large Economies | Whole Sample | Excluding Large Economies | Whole Sample | Excluding Large Economies | |

GDP Growth, t | −0.09 *** (0.03) | −0.10 *** (0.03) | −0.08 ** (0.04) | −0.10 ** (0.05) | −0.10 * (0.05) | −0.14 ** (0.06) |

Cragg–Donald F-Stat | 48.8 | 13.7 | 27.9 | 13.7 | 8.7 | 7 |

Kleibergen–Paap F-Stat | 33.65 | 13.9 | 9.1 | 13.9 | 12.9 | 11.1 |

First-Stage Estimates for GDP Growth, t | ||||||

GDP Growth of Trading Partners, t | 2.65 *** (0.45) | 2.61 *** (0.45) | ||||

Commodity Price Index, t | 0.20 *** (0.07) | 0.18 *** (0.07) | ||||

Temperature Change, t | 0.71 *** (0.19) | 0.75 *** (0.22) | ||||

Country Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Observations | 913 | 733 | 908 | 728 | 990 | 670 |

Countries | 30 | 24 | 30 | 25 | 31 | 24 |

**Table 6.**Contemporaneous effects of GDP growth on action-based fiscal consolidations (examination of the exclusion restrictions).

Fiscal Consolidation | ||||||
---|---|---|---|---|---|---|

(1) | (2) | (3) | (4) | (5) | (6) | |

Whole Sample | Excluding Large Economies | |||||

GDP Growth, t | −0.08 *** (0.02) | −0.09 * (0.05) | −0.07 ** (0.03) | −0.08 ** (0.02) | −0.11 ** (0.06) | −0.07 ** (0.03) |

Temperature Change, t | 0.01 (0.04) | −0.01 (0.04) | ||||

GDP Growth of Trading Partners, t | 0.04 (0.17) | 0.1 (0.2) | ||||

Commodity Price Index, t | −0.00 (0.01) | −0.01 (0.01) | ||||

Hansen J, p-value | 0.73 | 0.68 | 0.98 | 0.61 | 0.86 | 0.61 |

Cragg–Donald F-Stat | 29.3 | 11.1 | 21.7 | 20.9 | 7.3 | 17 |

Kleibergen–Paap F-Stat | 16.1 | 10.4 | 23 | 14 | 7.4 | 21 |

First-Stage Estimates for GDP Growth | ||||||

Temperature Change, t | 0.73 *** (0.21) | 0.73 *** (0.21) | 0.74 *** (0.25) | 0.74 *** (0.25) | ||

GDP Growth of Trading Partners, t | 2.28 *** (0.47) | 2.28 *** (0.47) | 2.25 *** (0.49) | 2.25 *** (0.49) | ||

Commodity Price Index, t | 0.16 *** (0.07) | 0.16 ** (0.07) | 0.13 * (0.07) | 0.13 * (0.07) | ||

Country Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Observations | 882 | 882 | 882 | 702 | 702 | 702 |

Countries | 30 | 30 | 30 | 25 | 25 | 25 |

**Table 7.**Contemporaneous effects of GDP growth on action-based fiscal consolidations (dynamic model).

Fiscal Consolidation | ||||||
---|---|---|---|---|---|---|

(1) | (2) | (3) | (4) | (5) | (6) | |

Whole Sample | Excluding Large Economies | |||||

GDP Growth, t | −0.08 *** (0.03) | −0.07 *** (0.02) | −0.07 *** (0.02) | −0.09 *** (0.03) | −0.08 *** (0.02) | −0.08 *** (0.02) |

CONTROL VARIABLES | ||||||

Fiscal Consolidations, | 0.40 *** (0.05) | 0.40 *** (0.05) | 0.40 *** (0.05) | 0.40 *** (0.05) | 0.41 *** (0.05) | 0.41 *** (0.05) |

t − 1 | ||||||

Fiscal Consolidations, | −0.00 (0.07) | 0.01 (0.06) | −0.00 (0.07) | 0.01 (0.07) | ||

t − 2 | ||||||

GDP Growth, t − 1 | 0.02 (0.01) | 0.02 (0.01) | ||||

GDP Growth, t − 2 | −0.02 ** (0.01) | −0.02 ** (0.01) | ||||

Hansen J, p-value | 0.97 | 0.99 | 0.98 | 0.89 | 0.72 | 0.83 |

Cragg–Donald F-Stat | 13 | 20.4 | 22 | 9.4 | 14.7 | 15.5 |

Kleibergen–Paap F-Stat | 14 | 13.7 | 13.8 | 12.6 | 12.4 | 12.1 |

First-Stage Estimates for GDP Growth, t | ||||||

Temperature Change | 0.60 *** (0.2) | 0.60 *** (0.21) | 0.58 *** (0.21) | 0.63 *** (0.24) | 0.60 *** (0.26) | 0.59 ** (0.26) |

GDP Growth of Trading Partners | 1.64 *** (0.37) | 2.16 *** (0.49) | 2.04 *** (0.49) | 1.61 *** (0.38) | 2.14 *** (0.51) | 1.99 *** (0.51) |

Commodity Price Index | 0.14 ** (0.07) | 0.20 *** (0.07) | 0.22 *** (0.06) | 0.13 * (0.07) | 0.18 ** (0.07) | 0.20 *** (0.06) |

Country Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Observations | 797 | 797 | 824 | 627 | 627 | 649 |

Countries | 29 | 29 | 29 | 24 | 24 | 24 |

**Table 8.**Contemporaneous effects of GDP growth on action-based fiscal consolidations (at different time horizons).

Fiscal Consolidation (h) | ||||||
---|---|---|---|---|---|---|

(1) | (2) | (3) | (4) | (5) | (6) | |

h = 0 | h = 1 | h = 2 | h = 0 | h = 1 | h = 2 | |

Whole Sample | Excluding Large Economies | |||||

GDP Growth (h) | −0.08 *** (0.03) | −0.07 *** (0.02) | −0.07 *** (0.02) | −0.09 *** (0.03) | −0.06 *** (0.02) | −0.06 *** (0.02) |

CONTROL VARIABLES | ||||||

Fiscal Consolidation, t − 1 | 0.40 *** (0.05) | 0.53 ** (0.11) | 0.54 *** (0.13) | 0.41 *** (0.05) | 0.55 ** (0.12) | 0.56 *** (0.14) |

Fiscal Consolidation, t − 2 | −0.00 (0.06) | −0.02 (0.07) | −0.00 (0.07) | −0.00 (0.06) | −0.03 (0.07) | −0.01 (0.07) |

GDP Growth, t − 1 | 0.02 (0.02) | 0.01 (0.02) | −0.01 (0.02) | 0.02 (0.02) | −0.00 (0.02) | −0.02 (0.02) |

GDP Growth, t − 2 | −0.02 ** (0.00) | −0.03 ** (0.01) | −0.04 *** (0.02) | −0.02 ** 0 | −0.04 *** (0.02) | −0.05 *** (0.02) |

First-Stage Estimates for GDP Growth (h) | ||||||

Temperature Change (h) | 0.60 *** (0.2) | 0.76 ** (0.37) | 1.41 *** (0.54) | 0.63 *** (0.24) | 0.68 * (0.4) | 1.21 ** (0.06) |

GDP Growth of Trading Partners (h) | 1.64 *** (0.37) | 2.35 *** (0.56) | 3.01 *** (0.73) | 1.61 *** (0.38) | 2.34 *** (0.57) | 3.08 *** (0.74) |

Commodity Price Index (h) | 0.14 ** (0.07) | 0.21 *** (0.07) | 0.22 *** (0.08) | 0.13 * (0.07) | 0.19 *** (0.07) | 0.20 *** (0.07) |

Cragg–Donald F-Stat | 14 | 16.5 | 19.1 | 9.4 | 15.9 | 23.01 |

Kleibergen–Paap F-Stat | 13 | 22.7 | 32.1 | 12.6 | 16.5 | 23.76 |

Hansen J, p-value | 0.97 | 0.58 | 0.42 | 0.89 | 0.43 | 0.27 |

Country Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Observations | 797 | 768 | 739 | 627 | 603 | 579 |

Countries | 29 | 29 | 29 | 24 | 24 | 24 |

GDP Growth (h) | ||||||
---|---|---|---|---|---|---|

(1) | (2) | (3) | (4) | (5) | (6) | |

h = 0 | h = 1 | h = 2 | t = 0 | t = 1 | t = 2 | |

Whole Sample | Excluding Large Economies | |||||

Panel A: Two-Stage Least Squares | ||||||

Fiscal Consolidation (h) | 1.84 *** (0.51) | 1.46 *** (0.55) | 1.38 ** (0.61) | 2.00 *** (0.58) | 1.61 *** (0.62) | 1.52 ** (0.7) |

[Wild Restricted Efficient Cluster Bootstrapped 95% Confidence Interval] | ||||||

[0.72, 2.83] | [0.35, 2.69] | [0.20, 3.08] | [0.67, 3.26] | [0.31, 3.01] | [0.11, 3.49] | |

First Stage for Fiscal Consolidation (h) | ||||||

u^{res} | 0.88 *** (0.03) | 0.91 *** (0.03) | 0.91 *** (0.03) | 0.86 *** (0.03) | 0.90 *** (0.04) | 0.89 *** (0.05) |

Cragg–Donald F-Stat | 4253.7 | 5376.2 | 4590.9 | 2878.5 | 3467.7 | 2830.2 |

Kleibergen–Paap F-Stat | 807.4 | 887.7 | 633 | 550.9 | 569.5 | 378.2 |

Panel B: Least Squares | ||||||

Fiscal Consolidation (h) | −0.44 *** (0.15) | −0.57 ** (0.22) | −0.74 *** (0.27) | −0.45 ** (0.19) | −0.60 ** (0.24) | −0.80 *** (0.28) |

Controls and Observations in Panels A and B | ||||||

Country Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes | Yes | Yes |

Additional Controls | Yes | Yes | Yes | Yes | Yes | Yes |

Observations | 827 | 797 | 767 | 657 | 632 | 607 |

Countries | 30 | 30 | 30 | 25 | 25 | 25 |

^{res}= FiscalConsolidation(h)-α

^{IV}GDPGrowth(h), where α

^{IV}is the estimated coefficient on GDPGrowth(h) from Table 8. Additional controls, with estimates not reported, are GDP growth in t − 1 and t − 2, fiscal consolidations in t − 1 and t − 2, and computed for each horizon, h = 0, 1, and 2, temperature changes (h), GDP growth of trading partners (h), and the international commodity price index (h). * Significantly different from zero at the 10 percent level, ** 5 percent level, and *** 1 percent level.

**Table 10.**Effects of action-based fiscal consolidations on total factor productivity, investment, consumption, and net-exports.

Total Factor Productivity Growth | Investment Growth | Consumption Growth | Change in Net-Exports GDP Share | |
---|---|---|---|---|

(1) | (2) | (3) | (4) | |

Panel A: Whole Sample | ||||

Fiscal Consolidation, t | 0.62 ** (0.26) | 2.34 ** (1.08) | 0.48 (0.41) | 0.81 *** (0.24) |

Cragg–Donald F-Stat | 3799.3 | 3826.8 | 3999.3 | 3840.4 |

Kleibergen–Paap F-Stat | 690 | 689.7 | 701.9 | 690.8 |

Observations | 797 | 797 | 797 | 797 |

Countries | 29 | 29 | 29 | 29 |

Country Fixed Effects | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes |

Additional Controls | Yes | Yes | Yes | Yes |

Panel B: Excluding 5 Largest Economies | ||||

Fiscal Consolidation, t | 0.62 ** (0.28) | 2.35 ** (1.15) | 0.42 (0.42) | 0.82 *** (0.25) |

Cragg–Donald F-Stat | 2963.2 | 2989.8 | 3146.3 | 2997.2 |

Kleibergen–Paap F-Stat | 603.3 | 609.5 | 622 | 608.5 |

Observations | 627 | 627 | 627 | 627 |

Countries | 24 | 29 | 29 | 29 |

Country Fixed Effects | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes |

Additional Controls | Yes | Yes | Yes | Yes |

Inflation | Inflation | Real Exchange Rate | Real Exchange Rate | |
---|---|---|---|---|

(1) | (2) | (3) | (4) | |

Whole Sample | Excluding 5 Largest Economies | Whole Sample | Excluding 5 Largest Economies | |

Fiscal Consolidation, t | −2.33 *** (0.75) | −2.44 *** (0.82) | −0.95 ** (0.46) | −1.10 ** (0.48) |

Cragg–Donald F-Stat | 3793.9 | 2976.4 | 3604.4 | 2758.9 |

Kleibergen–Paap F-Stat | 676.1 | 600.4 | 918 | 893.9 |

Observations | 797 | 627 | 674 | 517 |

Countries | 29 | 25 | 25 | 20 |

Country Fixed Effects | Yes | Yes | Yes | Yes |

Time Fixed Effects | Yes | Yes | Yes | Yes |

Additional Controls | Yes | Yes | Yes | Yes |

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**MDPI and ACS Style**

Brueckner, M.
Action-Based Fiscal Consolidations and Economic Growth. *J. Risk Financial Manag.* **2024**, *17*, 194.
https://doi.org/10.3390/jrfm17050194

**AMA Style**

Brueckner M.
Action-Based Fiscal Consolidations and Economic Growth. *Journal of Risk and Financial Management*. 2024; 17(5):194.
https://doi.org/10.3390/jrfm17050194

**Chicago/Turabian Style**

Brueckner, Markus.
2024. "Action-Based Fiscal Consolidations and Economic Growth" *Journal of Risk and Financial Management* 17, no. 5: 194.
https://doi.org/10.3390/jrfm17050194