Essay Proposal of Fiscal Adjustment

1346 Words Feb 17th, 2014 6 Pages
1 Introduction
After the financial crisis of 2007 almost the entire European countries now has to deal with a great debt crisis. Governments of countries in the west have to use fiscal adjustments in order to get their public finances straight. In this paper we want to establish which lessons can be learned from the past when it comes to conducting successful fiscal adjustments. While not looking at the factors which contribute to the appearance of a fiscal adjustment, we will focus on the factors which influence the success of the adjustment. Examples of these factors are revenue increases, cuts in government spending, the debt-to-GDP ratio and some political variables. In general, each factor accounts for one hypothesis. The paper which
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The economic data is mainly collected from the OECD database. Data on political variables is taken from the database previously used by De Haan et al. (2007). Our main findings are that rapid and gradual adjustments are mainly influenced by the same factors. As already stated by Alesina et al. (1998), we find that expenditure cuts contribute more to the success of adjustments than increases in tax revenues. It is also shown, that fiscal adjustments seem to be more efficient, if initial debt levels are high. We find that the political variables do not show strong results. The remainder of this paper is structured as follows: in the second part, the hypotheses and associated literature are introduced. Part three is dealing with the model, definitions of fiscal adjustments and the data set. In the fourth part, the results are stated. We conclude in the fifth and final part.
2 Literature review and Hypotheses
In their research of the fiscal economy, Alesina et al. (1998) found that cuts in government spending, as cuts in government wages or a change in the number of people employed in the public sector, appear to be used intensively in successful adjustments. When adjustments were unsuccessful, expenditures only accounted for a small change of the consolidation plans. Also, Alesina et al. (1998) state that the increase in revenues is higher during unsuccessful adjustments relative to expenditure cuts.

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