Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154203
Authors: 
Beetsma, Roel
Cimadomo, Jacopo
Furtuna, Oana
Giuliodori, Massimo
Year of Publication: 
2015
Series/Report no.: 
ECB Working Paper 1770
Abstract: 
We explore how fiscal consolidations affect private sector confidence, a possible channel for the fiscal transmission that has received particular attention recently as a result of governments embarking on austerity trajectories in the aftermath of the crisis. Panel regressions based on the action-based datasets of De Vries et al. (2011) and Alesina et al. (2014) show that consolidations, and in particular their unanticipated components affect confidence negatively. The effects are stronger for revenue-based measures and when institutional arrangements, such as fiscal rules, are weak. To obtain a more accurate picture of how consolidations affect confidence, we construct a monthly dataset of consolidation announcements based on the aforementioned datasets, so that we can study the confidence effects in real time using an event study. Consumer confidence falls around announcements of consolidation measures, an effect driven by revenue-based measures. Moreover, the effects are most relevant for European countries with weak institutional arrangements, as measured by the tightness of fiscal rules or budgetary transparency. The effects on producer confidence are generally similar, but weaker than for consumer confidence. Long-term interest rates, as a measure of confidence in the sovereign, tend to fall around spending-based consolidation announcements that take place in slump periods. Overall, if confidence is a concern and consolidation is unavoidable, spending-based measures seem preferable. Slump periods are not necessarily bad moments for such measures, while strengthening institutional arrangements may help in mitigating adverse confidence effects.
Subjects: 
announcements
consolidation plans
consumer- and business confidence
Event study
institutional quality
long-term interest rates
revenues
spending
JEL: 
H60
H61
H62
ISBN: 
978-92-899-1583-0
Document Type: 
Working Paper

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