Skip to main content
SpringerLink
Log in

Structural Public Balance Adjustment Effects on Growth in 25 OECD Countries and the Eurozone

  • Article
  • Published:
Comparative Economic Studies Aims and scope Submit manuscript

Abstract

The aim of the paper is to estimate the effects of structural public balance adjustment on growth in 25 OECD countries with special attention to selected Eurozone countries in the years 2000–2013. The estimates show a positive effect of discretionary fiscal policy on GDP growth and support the conclusion that structural adjustments have negative effects on growth irrespective of macroeconomic conditions. These results show that, if the reduction of the structural balance has to be considered as an objective to be achieved per se, such a goal should not be pursued in times of deteriorating macroeconomic conditions.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2
Figure 3
Figure 4

Similar content being viewed by others

Notes

  1. The OECD definition available at http://stats.oecd.org/glossary/detail.asp?ID=3343

  2. Zemanek et al. (2010) use this econometric technique to test the structural adjustment effect on the Euro area current account imbalances.

  3. In the Eurozone, for example, current account imbalances should be considered the root causes of diverging growth rates and deteriorating fiscal positions as in Gross (2011), Belke and Dreger (2013) and Canale and Marani (2014).

  4. Greer (2013) proposes the following conclusions from the ‘conditionality debate’ or the debate about the structural adjustment programs implemented in the developing world in exchange for financial help: ‘The null hypotheses from the large literature on structural adjustment policies suggest that the EAPs will: be badly implemented; be neutral or bad for growth; be bad for equity and the poor; have unpredictable policy consequences; and will allow incumbent elites to preserve their positions. Preliminary evidence from the three peripheral countries confirms that the same problems are afflicting E(conomic) A(djustments) P(rogram)s’ (abstract).

  5. These are called ‘Keynesian effects of non-Keynesian fiscal policies’ and are discussed in Canale et al. (2008).

  6. A detailed review of the empirical literature can be found in Canale et al. (2008).

  7. The large number of studies of the efficacy of fiscal policy follows, on the empirical side, different approaches that can be categorized into four main groups (a) single equation estimation techniques (OLS, GMM and TSLS estimations); (b) dynamic stochastic general equilibrium models (DSGE), which are large theory-guided models that impose theoretically motivated restrictions (c) vector auto regression (VAR) and (d) cross-section and panel data analysis in order to analyze the relationships between fiscal policy and output. These contributions estimate the reaction of consumption to interest rates, exchange rates and investment to fiscal policies. For a detailed review of the literature see Canale et al. (2008) paragraph 3 and, for an update, Qazizada and Stockhammer (2014).

  8. De Grauwe and Yuemei (2013) affirm that ‘austerity has left a legacy of unsustainable debt levels’ and that austerity measures are going to undermine, not only the growth process, but also the sustainability of public accounts.

  9. Zemanek et al. (2010) used the same European country sample to estimate the effects of structural reforms on current account imbalances in the Eurozone.

  10. As the OECD affirms, the change in structural adjustment can be interpreted as the cause of change in growth rather than the effect (see above).

  11. It is worth noting that, among all the Pedroni tests, the ADFs have the highest power in small samples (see Pedroni, 2004).

  12. Since in small sample, as in this study, Westerlund (2007) warns that the results of the tests could be sensitive to the choice of the lag and lead lengths, we keep them equal to one.

  13. For small T all the estimators (group-specific, mean Group, PMG and fixed effects) will be subject to the familiar downward bias of the coefficient of the lagged dependent variable (Pesaran et al., 1999).

References

  • Alesina, A. and Ardagna, S. 1998: Tales of fiscal adjustment. Economic Policy 13 (27): 487–545.

    Article  Google Scholar 

  • Alesina, A. and Ardagna, S. 2010: Large changes in fiscal policy: Taxes versus spending. In: Brown, J.R. (ed). Tax Policy and the Economy. Vol. 24, National Bureau of Economic Research, pp. 35–68.

  • Alesina, A. and Ardagna, S. 2012: The design of fiscal adjustments. NBER Working Papers 18423, National Bureau of Economic Research.

  • Alesina, A. and Perotti, R. 1995: Fiscal expansions and adjustments in OECD countries. Economic Policy 10 (21): 205–248.

    Article  Google Scholar 

  • Alesina, A and Perotti, R. 1997: Fiscal adjustments in OECD countries: Composition and macroeconomic effects. International Monetary Fund Staff Papers 44: 210–248.

    Article  Google Scholar 

  • Ardagna, S. 2004: Financial Markets Behavior around Episodes Of Large Changes in the Fiscal Stance. European Central Bank Working paper no. 390.

  • Barro, R. J. 1974: Are government bonds net wealth? Journal of Political Economy 82 (6): 1095–1117.

    Article  Google Scholar 

  • Belke, A. and Dreger, C. 2013: Current account imbalances in the Euro area: Does catching up explain the development? Review of International Economics 21 (1): 6–17.

    Article  Google Scholar 

  • Berti, K., de Castro, F. and Salto, M. 2013: Effects of fiscal consolidation envisaged in the 2013 Stability and Convergence Programmes on public debt dynamics in EU Member States. European Economy. Economic Papers 504: September.

  • Blanchard, O. and Leigh, D. 2013: Growth forecast errors and fiscal multipliers. IMF Working Paper, January.

  • Blanchard, O. and Perotti, R. 1999: An empirical characterization of the dynamic effects of changes in government spending and taxes on output. NBER Working Paper: 7269, National Bureau of Economic Research.

  • Canale, R. R., Foresti, P, Marani, U and Napolitano, O. 2008: On Keynesian effects of (apparent) Non-keynesian fiscal policies. Politica Economica XXIV (1): 5–46.

    Google Scholar 

  • Canale, R. R. and Marani, U. 2014: Current account and fiscal imbalances in the Eurzone: Siamese twins in an asymmetrical currency union. International Economics and Economic Policy, doi: 10.1007/s10368-014-0268-9, February.

  • Caporale, G. M. and Cerrato, M. 2006: Panel data tests of PPP: A Critical overview. Applied Financial Economics 16 (1–2): 73–91.

    Article  Google Scholar 

  • Christiano, L, Eichenbaum, M and Rebelo, S. 2011: When is the government spending multiplier large? Journal of Political Economy 119 (1): 78–121.

    Article  Google Scholar 

  • Corsetti, G., Meier, A. and Müller, G. 2012: What determines government spending multipliers? Economic Policy 27 (72): 521–565.

    Article  Google Scholar 

  • De Grauwe, P. and Yuemei, J. 2013: The legacy of austerity in the Euro-zone. CEPS commentaries. October, Center for European Policy Studies, Brussel.

  • DeLong, J. B. and Summers, L. H. 2012: Fiscal policy in a depressed economy. Brookings papers on economic activity, Economic Studies Program, The Brookings Institution, 44(1): pp. 233–297.

  • Engle, R. F. and Granger, C. W. J. 1987: Cointegration and error correction: Representation, estimation and testing. Econometrica 55 (2): 251–276.

    Article  Google Scholar 

  • European Central Bank. 2012: The role of fiscal multipliers in the current consolidation debate. Monthly Report, December, Box 6: pp. 82–85.

  • Galí, J., López-Salido, D. and Vallés, J. 2007: Understanding the effects of government spending on consumption. Journal of the European Economic Association 5 (1): 227–270.

    Article  Google Scholar 

  • Giavazzi, F. and Pagano, M. 1990: Can severe fiscal contractions be expansionary? Tales of two small European countries. NBER Working Paper series, n. 3372, National Bureau of Economic Research.

  • Greer, S. L. 2013: Structural Adjustment Comes to Europe: Lessons for the Eurozone from the Conditionality Debates. February 1, http://dx.doi.org/10.2139/ssrn.

  • Gros, D. 2011: Greece and Portugal – Similar fundamentals but different outcomes? CEPS Commentaries. Centre for European Policy Studies. 17: 02.

  • Hadri, K. 2000: Testing for stationarity in heterogeneous panel data. Econometrics Journal 3 (2): 148–161.

    Article  Google Scholar 

  • Harris, R. and Sollis, R. 2003: Applied time series modelling and forecasting. John Wiley and sons: UK.

    Google Scholar 

  • Ilzetzki, E., Mendoza, E. G. and Végh, C. A. 2013: How big (small?) are fiscal multipliers? Journal of Monetary Economics. Elsevier 60 (2): 239–254.

    Article  Google Scholar 

  • Im, K.S., Pesaran, M.H. and Shin, Y. 2003: Unit Roots in heterogeneous panels. Journal of Econometrics 115 (1): 53–74.

    Article  Google Scholar 

  • International Monetary Fund. 2010: Will it hurt? Macroeconomic effects of fiscal consolidations. The World Economic Outlook. Chapter 3, October.

  • Kao, C. 1999: Spurious regression and residual based tests for cointegration in panel data. Journal of Econometrics 90 (1): 1–44.

    Article  Google Scholar 

  • Krugman, P. 2013: How the case for austerity has crumbled. The New York Times, June 6, 2013.

  • Levin, A., Lin, C.F. and Chu, C.J. 2002: Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics 108 (1): 1–24.

    Article  Google Scholar 

  • Maddala, G.S. and Wu, S. 1999: A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics 61 (0): 631–652.

    Article  Google Scholar 

  • Mark, C. N. and Sul, D. 2003: Cointegration vector estimation by panel DOLS and long-run money Demand. Oxford Bulletin of Economics and Statistics. Department of Economics, University of Oxford, 65(5): pp. 655–680.

  • Pedroni, P. 1999: Critical values for cointegration tests in heterogenous panels with multiple regressors. Oxford Bulletin of Economics and Statistics 61 (0): 653–670.

    Article  Google Scholar 

  • Pedroni, P. 2004: Panel cointegration, asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory 20 (3): 597–625.

    Article  Google Scholar 

  • Perotti, R. 2011: The austerity myth. gain without pain? NBER Working Paper 17571, National Bureau of Economic Research.

  • Pesaran, M. H. 2007: A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics 22 (2): 265–312.

    Article  Google Scholar 

  • Pesaran, M. H. and Baltagi, B. H. 2007: Heterogeneity and cross section dependence in panel data models: Theory and applications introduction. Journal of Applied Econometrics 22 (2): 229–232.

    Article  Google Scholar 

  • Pesaran, M. H., Shin, Y and Smith, R P. 1999: Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association 94 (446): 621–634.

    Article  Google Scholar 

  • Qazizada, W. and Stockhammer, E. 2014: Government spending multipliers in contraction and expansion, PKSG Working Paper 1404, Post-Keynesian Study Group.

  • Reinhart, C. M. and Rogoff, K. S. 2010: Growth in time of Debt. American Economic Review: Papers and Proceedings 100: 573–578.

  • Saikkonen, P. 1991: Asymptotically efficient estimation of cointegration regressions. Econometric Theory. Cambridge University Press 7 (1): 1–21.

    Article  Google Scholar 

  • Stock, J. H. and Watson, M. M. 1993: A procedure for predicting recessions with leading indicators: Econometric issues and recent experience. Business Cycles, Indicators and Forecasting, National Bureau of Economic Research, pp. 95–156.

  • Wagner, M. and Hlouskova, J. 2010: The performance of panel cointegration methods: Results from a large scale simulation study. Econometric Reviews 29 (2): 182–223.

    Article  Google Scholar 

  • Westerlund, J. 2007: Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics 69 (6): 709–748.

    Article  Google Scholar 

  • Woodford, M. 2011: Simple analytics of the government spending multiplier. American Economic Journal: Macroeconomics 3 (1): 1–35.

    Google Scholar 

  • Zemanek, H., Belke, A. and Schnabl, G. 2010: Current account balances and structural adjustment in the euro area. International Economics and Economic Policy 7 (1): 83–127.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Business and Economic Studies, University of Naples ‘Parthenope’, Via Generale Parisi, 13, Naples, 80133, Italy

    Rosaria Rita Canale, Giorgio Liotti & Oreste Napolitano

Authors
  1. Rosaria Rita Canale
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Giorgio Liotti
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Oreste Napolitano
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Canale, R., Liotti, G. & Napolitano, O. Structural Public Balance Adjustment Effects on Growth in 25 OECD Countries and the Eurozone. Comp Econ Stud 56, 635–656 (2014). https://doi.org/10.1057/ces.2014.26

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/ces.2014.26

Keywords

JEL Classifications

Search

Navigation