9
not a change motivated by a desire to return growth to normal or to prevent abnormal growth.
So it is exogenous” (Romer and Romer, 2010, p. 770). The U.S. Omnibus Budget
Reconciliation Act of 1993 provides an example of such a policy change. The Act involved
raising taxes and cutting spending not to reduce the risk of economic overheating, but
because policymakers saw it as a prudent policy change with potential long-term benefits.
Austria in 1996 provides another example. The authorities introduced austerity measures to
conform to the budget deficit criteria for European Monetary Union (EMU) accession,
agreed under the terms of the 1992 Maastricht Treaty, and not because there was a risk of
economic overheating. Such changes in fiscal policy are thus valid for estimating the short-
term effects of fiscal policy on economic activity and testing the expansionary austerity
hypothesis.
While the historical approach addresses some of the problems associated with the
conventional approach discussed above, it is subject to three additional criticisms that also
apply to the conventional approach. First, if countries sometimes postpone fiscal
consolidation until the economy recovers, then the consolidation exercise will be associated
with good economic outcomes in both the standard approach based on the CAPB and our
approach. Second, if a country is committed to a deficit-reduction path and the economy falls
into a recession, it may implement additional fiscal consolidation measures, thus associating
fiscal consolidation with unfavorable economic outcomes in both the standard CAPB-based
approach and our approach. Thus, biases may remain even in our approach, although it is
unclear in which direction they would go overall. Third, both the CAPB-based approach and
our historical approach record changes in fiscal policy when they occur, which ignores the
role of anticipation effects highlighted by Ramey (2011). Thus, while the changes in fiscal
policy that we identify should be “exogenous” in the Romer and Romer (2010) sense—
explicitly not a response to the business cycle—they are not necessarily unanticipated.
However, as Beetsma, Giuliodori and Klaassen (2008) point out, at the annual frequency
used here, the role of anticipation effects is likely to be smaller than at the quarterly
frequency used by Ramey (2011) and Romer and Romer (2010).
To identify the policy changes, we examine a wide range of contemporaneous policy
documents. The contemporaneous sources include Budgets, Budget Speeches, central bank
reports, Convergence and Stability Programs submitted by the authorities to the European
Commission, IMF Recent Economic Developments reports, IMF Staff Reports, and OECD
Economic Surveys. In addition, we examine country-specific sources, such as the
Congressional Budget Office (CBO) reports and the Economic Report of the President for
the United States, the Journal Officiel de la Republique Francaise for France, Ministry of
Finance press releases and publications, and, in one case, a transcript of a television
interview. These documents provide evidence of what policymakers believed at the time that
policy measures were taken, and provide estimates of the measures’ budgetary impacts. Our
sample includes 17 OECD countries over the period 1978-2009. The countries are Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the
Netherlands, Portugal, Spain, Sweden, the United Kingdom and the United States. In a
companion paper, Devries et al. (2011), we provided detailed citations for each data point to
show how we determ
ine the motivation and estimated budgetary effects from the historical