This paper assesses the determinants of the length of fiscal consolidation
using annual data
for 17 industrial countries over the period 1978-2009.
Relying on a narrative approach to identify fiscal consolidation episodes, we
show that fiscal
variables (such as the budget deficit and the level of public debt) and economic
factors (such as
the degree of openness, the inflation rate, the interest rate and per capita GDP)
are crucial for
the fiscal consolidation process. Additionally, we employ continuous and discrete-time
analyses over a set of consolidation spells and find that evidence of positive
duration dependence, i.e., as time goes by, the likelihood of a fiscal consolidation ending is
higher. However, more flexible polynomial-in-time, time-dummies and cubic-splines specifications
suggest that the
hazard function is not monotonic: indeed, it increases until the eighth or ninth
year and starts
decreasing afterwards. We also find that: (i) spending-driven consolidations are
tax-driven consolidations; (ii) both types of consolidation are longer in Non-European
than for European countries; and (iii) the size of the consolidation program (in
GDP) does not significantly affect duration.
All in all, our results support the importance of cuts in government spending as
a way of
bringing economies into a sustainable path for public debt. Moreover, they
highlight the role
played by a fiscal framework that imposes discipline in governments as a device
shorten the length of fiscal consolidation episodes.
JEL Classification: C41; E62.
Keywords: Fiscal Consolidations, Duration Analysis, Weibull Model, Cubic Splines.