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© 2022 International Monetary Fund
WP/22/126
IMF Working Paper
Middle East and Central Asia Department
Fiscal Consolidation and Firm Level Productivity: Evidence from Advanced Economies
Prepared by Ngo Van Long and Maxwell Tuuli*
Authorized for distribution by Nicolas R. F. Blancher July 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Productivity dispersion across countries has led to several studies on the determinants of firm level productivity and the role of macroeconomic policies in determining productivity. In this paper, we investigate the effect of fiscal consolidation on firm level productivity in 12 advanced economies by combining an updated dataset of fiscal consolidation measures with firm level productivity. We find that fiscal consolidation (i.e., discretionary tax hikes and spending cuts), is detrimental to firm level productivity in advanced economies. We also find that high levels of fiscal consolidation are particularly harmful to firm level productivity compared to lower levels of fiscal consolidation. Furthermore, we find that tax based fiscal consolidation hinders firm level productivity more compared to spending based fiscal consolidation. This implies that the size and composition of fiscal consolidation matter in understanding the relationship between fiscal consolidation and firm level productivity.
RECOMMENDED CITATION: Long, N.V., and Tuuli, M. (2022), Fiscal Consolidation and Firm Level Productivity: Evidence from Advanced Economies, IMF Working Paper WP/22/126, Washington DC: International Monetary Fund.
| JEL Classification Numbers: | H20, H32, F6, D24, E62 |
| Keywords: | Fiscal consolidation; Taxes; Spending; Total Factor Productivity |
| Author’s E-Mail Address: | ngo.long@mcgill.ca; mtuuli@imf.org |
| JEL Classification Numbers: | H20, H32, F6, D24, E62 |
| Keywords: | Fiscal consolidation; Taxes; Spending; Total Factor Productivity |
| Author’s E-Mail Address: | ngo.long@mcgill.ca; mtuuli@imf.org |
Contents
1 Introduction
2 Literature Review
2.1 Macroeconomic effects of fiscal consolidation
2.2 Firm-level productivity
3 Data and Estimation Strategy
3.1 Firm level data
3.2 Macro Data
3.2.1 Fiscal policy shocks
3.2.2 Other macro variables
3.3 Estimating strategy
4 Estimation Results
4.1 Baseline results
4.2 Heterogeneity and the role of macroeconomic policies
4.3 The role of financial development and globalization
4.4 Unpacking the nature of fiscal consolidation
4.5 Dynamic response to fiscal consolidation
4.6 Effects of granular fiscal consolidation instruments
4.7 Robustness checks
5 Conclusion
6 Appendix
We would like to thank Charleen Gust, Linda Kaltani, Gilda Fernandez and the attendees at the Finance Departmental seminar for their valuable suggestions. We also acknowledge the insightful comments from Mr. Moreau, Philippe Wingender, and Diaa Noureldin on the initial draft. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.