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Fiscal stabilization and the credibility of the US budget sequestration spending austerity
Hu, Ruiyang1; Zarazaga, Carlos E2

The credibility of fiscal stabilization programs plays a critical role in their macroeconomic outcomes, yet formal assessments of that credibility are typically missing from analyses of the economic consequences and effectiveness of those programs. This paper remedies that omission for the most recent fiscalconsolidation attempt in the U.S.: the 2011-mandated budget sequestration spending cuts in discretionary spending slated to begin in 2013. The credibilityof those cuts is assessed with a novel methodology that draws on the "event study" and Business Cycle Accounting traditions. The paper finds that the fiscalausterity program had little, if any, credibility around the time it was scheduled to become effective and that studies that don't take this lack of credibilityinto account might overestimate the quantitative impact of the budget sequestration on key macroeconomic variables by a factor of three or more. These findings expose the dangers of extrapolating policy lessons extracted from the budget sequestration experience to other fiscal stabilization programs, without gauging first their credibility. Properly adapted and extended, the methodology the paper developed with that purpose could prove useful for thesystematic assessment of the credibility of other fiscal stabilization programs, of the impact of their credibility on aggregate outcomes and, ultimately, of thechances of those programs to successfully eliminate structural fiscal imbalances. (C) 2018 Elsevier B.V. All rights reserved.

KeywordFiscal Stabilization Us Government Spending Cuts Credibility Event-study Business Cycle Accounting
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Document TypeJournal article
CollectionFaculty of Social Sciences
Affiliation1.Southern Methodist Univ
2.Fed Reserve Bank Dallas
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GB/T 7714
Hu, Ruiyang,Zarazaga, Carlos E. Fiscal stabilization and the credibility of the US budget sequestration spending austerity[J]. JOURNAL OF ECONOMIC DYNAMICS & CONTROL,2018,9:54-66.
APA Hu, Ruiyang,&Zarazaga, Carlos E.(2018).Fiscal stabilization and the credibility of the US budget sequestration spending austerity.JOURNAL OF ECONOMIC DYNAMICS & CONTROL,9,54-66.
MLA Hu, Ruiyang,et al."Fiscal stabilization and the credibility of the US budget sequestration spending austerity".JOURNAL OF ECONOMIC DYNAMICS & CONTROL 9(2018):54-66.
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