Panel Data Evidence on Non-Keynesian Effects of Fiscal Policy in the EU New Member States

There is growing evidence that fiscal consolidation may contribute to economic growth even in the short term. In this paper we review recent research on such non-Keynesian fiscal policy effects and apply panel data econometric techniques to examine the consequences of fiscal consolidation in the EU New Member States. We extend the analysis to test potential channels through which non-Keynesian effects may operate. The results confirm that composition of the consolidation determines the output response. Moreover, we find evidence that all types of fiscal consolidations stimulate private investments, while export acceleration is observed only when consolidations involve mostly expenditure curtailment. Private consumption reaction to fiscal policy shows signs of nonlinearity – in the case of minor adjustments Keynesian effects dominate, but they are canceled out when sizable consolidations are considered.

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