Friday 7 September 2012

Back to national homework

As the plan for a deeper integration of the euro financial markets proceeds, ez-members need to continue their focus on macro rebalancing. An important aspect of the rebalancing relates to their fiscal consolidation plans. A new paper by Alberto Alesina, Carlo Favero and Francesco Giavazzi finds that: 1. Fiscal adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. More precisely: tax-based adjustments have been associate with prolonged and deep recessions while spending based adjustments have been associated with mild and short-lived recessions. 2. The heterogeneity in the effects of the two types of fiscal adjustments is mainly due to the response of private investment, rather than that to consumption growth. 

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