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Does Uncertainty Matter for the Fiscal Consolidation and Investment Nexus?

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Published/Copyright: February 29, 2024

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.

JEL Classification: E62; D81; C33

Corresponding author: Ioannis Bournakis, SKEMA Business School, 59777, Willy Brandt, Lille, France; and Universeité Côte d’ Azur, Nice, France, E-mail:

We are grateful to participants of the Economics Research Seminar at the University of Lincoln. We are also thankful for useful comments and suggestions to Dimitris Christopoulos, Peter McAdam, Marian Rizov, Evi Pappa and the anonymous reviewer. The usual disclaimer applies.


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Received: 2022-07-17
Accepted: 2024-02-09
Published Online: 2024-02-29

© 2024 Walter de Gruyter GmbH, Berlin/Boston

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