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Is it the How or the When that Matters in Fiscal Adjustments?

This draft November 2017

Using data from 16 OECD countries from 1981 to 2014 we study the effects  on output of fiscal adjustments as a function of the composition of the adjustment– that is, whether the adjustment is mostly based on spending cuts or on tax hikes – and of the state of the business cycle when the adjustment is implemented. We find that both the “how” and the “when” matter, but the heterogeneity related to the composition is more robust across different specifications. Adjustments based upon permanent spending cuts are consistently much less costly than those based upon permanent tax increases. Our results are generally not explained by different reactions of monetary policy. However, when the domestic central bank can set interest rates – that is outside of a currency union – it appears to be able to dampen the recessionary effects of consolidations implemented during a recession.
JEL Codes: E62, H60.
Keywords: fiscal consolidations, fiscal multipliers, fiscal components, fiscal plans, non-linearities.

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  • Last change 16/11/2017

    Nudging financial and demographic literacy: experimental evidence from an Italian Trade Union Pension Fund

    This Revision April 2017 

    Abstract: In this article, we present and test experimentally a low-cost, Internet-based, financial and demographic literacy program that we designed for implementation with the largest industrial pension fund in Italy. The program, Finlife (Financial Education and Planning for a Long Life) included 1) an instructional video and materials provided through the Internet; 2) an experimental design that explicitly allows to evaluate the impact of the instructional video and materials on financial and demographic literacy, as well as on short-term behavioral changes; 3) a follow-up to assess the stability of some of the experimental outcomes. Finlife was designed to be a low-cost and scalable approach to increase financial and demographic literacy, consistently with a ‘nudge’ philosophy. We show that Finlife delivered a substantially and statistically significant increase in financial and demographic literacy, as well as a push towards behaviors involving seeking more information on financial markets and choices related to financial planning.


    Keywords: pensions, financial literacy, demographic literacy, field experiment, Italian Trade Union Pension Fund

    JEL Classification: D91

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  • Last change 25/05/2017

    The effect of Fiscal Consolidations: Theory and Evidence

    This revision April 2017  

    AbstractAbstract We investigate the macroeconomic effects of fiscal consolidations based upon government spending cuts, transfers cuts and tax hikes. We extend a narrative dataset of fiscal consolidations, finding details on over 3500 measures. Government spending and transfer cuts are much less harmful than tax hikes. Standard New Keynesian models match our results when fiscal shocks are persistent. Wealth effects on aggregate demand mitigates the impact of a persistent spending cut. Static distortions caused by persistent tax hikes cause larger shifts in aggregate supply under sticky prices. This channel explains different sizes of multipliers found in fiscal stimuli compared to consolidation plans.

    JEL Codes: E62, H60.
    Key words: fiscal consolidations, fiscal multipliers, fiscal components, fiscal plans.


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  • Last change 25/05/2017

    Implications of Returns Predictability Across Horizon for Asset Pricing Models
    Favero CA, F.Ortu, A.Tamoni and H.Yang

    This Version March 2017 
    We use the evidence on predictability of returns at different horizons to discriminate among competing asset pricing models. Specifically, we employ predictors-based variance bounds, i.e. bounds on the variance of the Stochastic Discount Factors (SDFs) that price a given set of returns conditional on the information contained in a vector of return predictors. We show that return predictability delivers variance bounds that are much tighter than the classical, unconditional Hansen and Jagannathan (1991) bounds. We use the predictors-based bounds to discriminate among three leading classes of asset pricing models: rare disasters, long-run risks and external habit. We find that the rare disasters model of Nakamura, Steinsson, Barro, and Urs´ua (2013) is the best performer since it satisfies rather comfortably the predictors-based bounds at all horizons. As for long-run risks, while the classical version of Bansal and Yaron (2004) is the model most challenged by the introduction of conditioning information since it struggles to meet the bounds at all horizons, the more general version of Schorfheide, Song, and Yaron (2016), which accounts for multiple volatility components, satisfies the 1- and 5-year bounds as long as the set of test assets includes only equities and T-Bills. The Campbell and Cochrane (1999) habit model lies somehow in the middle: it performs quite well at our longest 5-year horizon while it struggles at the 1-year horizon. Finally, when the set of test assets is augmented with Treasury Bonds, the only model that is able to satisfy the predictors-based bounds is the rare disasters model.
    Keywords: returns predictability, predictors-based bound, asset pricing models

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  • Last change 25/05/2017

    Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns
    Carlo A. Favero


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  • Last change 05/12/2008

    The Predictive Power of the Yield Spread: further Evidence and a Structural Interpretation (Favero C.A., I.Kamynska and U.Soderstrom)
    Carlo A. Favero with I. Kaminska and U.Soderstrom

    (Jan 2005)

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  • Last change 15/01/2009

    Monetary-Fiscal Mix and Inflation Performance: Evidence from the U.S. (C.A. Favero and T.Monacelli)
    Carlo A. Favero with Tommaso Monacelli

    (revised January 2005)

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  • Last change 15/01/2009

    Last updated September 12, 2008