Abstract
The aim of this research paper is to investigate whether there are non-linearities in the relationship between fiscal consolidation and investment. To achieve this, we take into account the overall state of the economy, as represented by the level of uncertainty. We analyzed a sample of 27 OECD countries from 1996 to 2019 and identified two different regimes of low and high uncertainty. We found that the relationship between fiscal policy and investment is significantly different in these two regimes. In the low uncertainty regime, fiscal tightening has no significant effect on investment. In contrast, in the high uncertainty regime, fiscal tightening has a negative impact on investment, which is three times larger than in the low uncertainty regime. Our results are robust, and have been confirmed through a range of sensitivity tests.
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Articles in the same Issue
- Frontmatter
- Advances
- Optimal Taxation of Informal Firms: Misreporting Costs and a Tax Reform in Brazil
- Initial Beliefs Uncertainty
- Credit Resource Misallocation and Macroeconomic Fluctuations in China: From the Perspective of Heterogeneous Financial Frictions
- The Bitcoin Premium: A Persistent Puzzle
- Contributions
- Intermediate Goods–Skill Complementarity
- Perfect Competition and Fixed Costs: The Role of the Ownership Structure
- Optimal Monetary Policy with Government-Provided Unemployment Benefits
- Employment Protection in Dual Labor Markets: Any Amplification of Macroeconomic Shocks?
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- Current Account Balances’ Divergence in the Euro Area: An Appraisal of the Underlying Forces
- Merging Structural and Reduced-Form Models for Forecasting
- Trust in Government in a Changing World: Shocks, Tax Evasion, and Economic Growth
- The Fiscal Multiplier of Public Investment: The Role of Corporate Balance Sheet
- Does Uncertainty Matter for the Fiscal Consolidation and Investment Nexus?
- Government Spending Between Active and Passive Monetary Policy: An Invariance Result
- A DSGE Model with Government-owned Banks
Articles in the same Issue
- Frontmatter
- Advances
- Optimal Taxation of Informal Firms: Misreporting Costs and a Tax Reform in Brazil
- Initial Beliefs Uncertainty
- Credit Resource Misallocation and Macroeconomic Fluctuations in China: From the Perspective of Heterogeneous Financial Frictions
- The Bitcoin Premium: A Persistent Puzzle
- Contributions
- Intermediate Goods–Skill Complementarity
- Perfect Competition and Fixed Costs: The Role of the Ownership Structure
- Optimal Monetary Policy with Government-Provided Unemployment Benefits
- Employment Protection in Dual Labor Markets: Any Amplification of Macroeconomic Shocks?
- A Tide that Lifts Some Boats: Assessing the Macroeconomic Effects of EU Enlargement
- Current Account Balances’ Divergence in the Euro Area: An Appraisal of the Underlying Forces
- Merging Structural and Reduced-Form Models for Forecasting
- Trust in Government in a Changing World: Shocks, Tax Evasion, and Economic Growth
- The Fiscal Multiplier of Public Investment: The Role of Corporate Balance Sheet
- Does Uncertainty Matter for the Fiscal Consolidation and Investment Nexus?
- Government Spending Between Active and Passive Monetary Policy: An Invariance Result
- A DSGE Model with Government-owned Banks