TOTAL FACTOR
PRODUCTIVITY (TFP) AND FISCAL CONSOLIDATION: HOW HARMFUL IS AUSTERITY?
Ioanna
Bardaka
Bank
of Greece
Ioannis
Bournakis
Middlesex
University
Georgia
Kaplanoglou
University
of Athens
Abstract
Departing from the
expansionary austerity literature, this study assesses empirically whether
fiscal consolidation propagates changes in the supply side of the economy that
can potentially influence total factor productivity. Using a panel dataset of 26 OECD countries
over the period 1980-2016 and employing panel vector autoregressive and error
correction model specifications, we present evidence of both short-run and
long-run negative effects of fiscal consolidation on TFP. The short-run impact
is disproportionately more damaging for the TFP of low debt countries, while,
contrary to the expansionary austerity thesis, our empirical results would
advise against spending-driven fiscal consolidation, since such consolidation
undermines capacity due to the importance of government spending in shaping
productive capital. Our results have
serious policy implications for the implementation and design of fiscal
adjustment programmes.
JEL Classification: E62,
C23, H68
Keywords: total factor
productivity, fiscal consolidation, OECD countries, austerity, growth
Acknowledgments: The
authors wish to thank participants of the 9th CGBCR Conference,
University of Manchester, Vassilis Rapanos (University of Athens and Academy of Athens), Heather Gibson, Hiona
Balfoussia
and Dimitris Papaoikonomou (Bank of Greece) for valuable comments and
suggestions. The views expressed in this paper are those of the authors and do
not necessarily reflect those of the Bank of Greece.
Correspondence:
Ioanna Bardaka
Bank of Greece
21 E. Venizelos Avenue
102 50 Athens
email: IMpardaka@bankofgreece.gr