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Konjunkturinstitutet - National Institute of Economic Research Working Papers, Konjunkturinstitutet - National Institute of Economic Research

No 92:
When Are Fiscal Contractions Successful? Lessons for Countries Within and Outside the EMU

Göran Hjelm ()

Abstract: In the past 25 years, many OECD countries have implemented fiscal contractions to strengthen their public finances. The macroeconomic outcomes of these efforts have

varied. With the aid of an econometric model, this paper seeks to identify the factors

that make contractions successful from a macroeconomic standpoint. The findings

suggest, among other things, that favorable changes in the real exchange rate prior

to the period of fiscal contraction and in the real quantity of money during this period

play an important part in the macroeconomic outcome. This indicates in turn that it

may be more difficult to implement successful fiscal contractions within the EMU. The

findings also show that the composition of the contraction in regard to the relative

proportions of tax increases and expenditure cutbacks, respectively, is probably less

important than has usually been assumed.

Keywords: Fiscal Contractions; Fiscal Policy; Real Exchange Rate; EMU; (follow links to similar papers)

JEL-Codes: C20; E62; E63; H30; (follow links to similar papers)

27 pages, June 16, 2004

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This paper is published as:
Hjelm, Göran, (2007), 'Expansionary Fiscal Contractions: a Standard Keynesian Explanation', Journal of Post Keynesian Economics, Vol. 29, Winter, No. 2, pages 327-358



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