The literature on fiscal multipliers is far from reaching an agreed upon conclusion about their size and how they might be state contingent.1 There is so much debate about this issue that Eric Leeper (2010) defined this literature as "alchemy." One result, however, seems very robust: in OECD economies fiscal consolidations (austerity) based upon expenditure cuts are much less costly than those performed on the tax side. This result was originally shown by an early literature which studied episodes of austerity before the Great Recession. Alesina and Ardagna (2010) summarized and extended these results, which were then confirmed in IMF (2010) and Guajardo, Leigh, and Pescatori (2014) using a methodology based upon the narrative method pioneered by Romer and Romer (2010). The purpose of this paper is two-fold. First, we review more recent evidence which uses an extension of the narrative method which considers multi-year fiscal plans rather than year-by-year shifts in fiscal variables, like in Romer and Romer (2010) and Guajardo, Leigh, and Pescatori (2014). We shall also document cases of "expansionary austerity," namely episodes in which even large reductions of government spending were associated on impact with increases in GDP growth, a possibilityfirst recorded by Giavazzi and Pagano (1990). Second, we illustrate alternative theoretical explanations for our findings about spending-versus tax-based consolidations.
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