Total factor productivity (TFP) and fiscal consolidation: How harmful is austerity?

Bardaka, Ioanna, Bournakis, Ioannis ORCID logoORCID: and Kaplanoglou, Georgia (2021) Total factor productivity (TFP) and fiscal consolidation: How harmful is austerity? Economic Modelling, 94 . pp. 908-922. ISSN 0264-9993 [Article] (doi:10.1016/j.econmod.2020.02.032)

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Departing from the expansionary austerity literature, this study assesses empirically whether fiscal consolidation propagates changes in the supply side of the economy that can potentially influence total factor productivity (TFP). Using a panel data set of 26 OECD countries over the period 1980–2016 and employing panel vector auto-regressive and panel co-integration techniques, we present evidence of both short-run and long-run negative effects of fiscal consolidation on TFP. The short-run impact is disproportionately more damaging for the TFP of low debt countries, while, contrary to the expansionary austerity thesis, our empirical results would advise against spending-driven fiscal consolidation, since such consolidation undermines capacity, due to the importance of government spending in shaping productive capital. Our results have serious policy implications for the implementation and design of fiscal adjustment programmes.

Item Type: Article
Research Areas: A. > Business School > Economics
Item ID: 29444
Notes on copyright: © 2020. This manuscript version is made available under the CC-BY-NC-ND 4.0 license.
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Depositing User: Ioannis Bournakis
Date Deposited: 02 Mar 2020 14:14
Last Modified: 29 Nov 2022 18:02

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