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We use a panel of 21 OECD countries from 1970 to 2009 to investigate the effects of different fiscal adjustment strategies on long-term interest rates - a key fiscal indicator reflecting the costs of government debt service. A government confronted with high deficits and rising debt will sooner or later need to enact fiscal adjustments in order to avoid solvency problems. Over the last four decades, such measures taken by governments in OECD countries have varied in duration, size, composition and in their success to re-establish fiscal sustainability. Controlling for various economic, fiscal and political factors, we find that the size and the composition of a fiscal adjustment significantly affect interest rates as well as yield spreads. Adjustments that are relatively large and those that primarily depend on expenditure cuts lead to substantially lower long-term interest rates. However, periods of fiscal adjustments do not generally have an influence on interest rates, even if they were successful and led to lower deficits and debt levels. Instead, financial markets only seem to value strict and decisive measures - a clear sign that the government's pledge to cut the deficit is credible

ZusammenfassungThis article examines whether spending decisions in Swiss cantons are interdependent, that is, whether the spending decisions of a canton are influenced by those of other cantons. Theoretically, fiscal policy imitation among cantons can be interpreted as a process of policy and innovation diffusion, as a result of tax competition or as a consequence of federalism as a policy laboratory. The panel analysis presented in this article provides evidence of the existence of budget spillovers among neighbouring cantons. Cantonal governments do not take spending decisions in isolation, but by systematically comparing the fiscal policies in neighbouring cantons.

This article examines whether spending decisions in Swiss cantons are interdependent, ie, whether the decisions of one canton are influenced by those of other cantons. Theoretically, fiscal policy imitation among cantons can be interpreted as a process of policy & innovation diffusion, as a result of tax competition, or as a consequence of federalism as a policy laboratory. The panel analysis presented in this article provides evidence of the existence of budget spillovers among neighboring cantons. Cantonal governments do not make spending decisions in isolation, but by systematically comparing the fiscal policies in neighboring cantons. 2 Tables, 1 Appendix, 60 References. Adapted from the source document.

ZusammenfassungWelche territoriale Gliederung sollte der Schweizer Föderalismus annehmen? Könnte ein Zusammenfügen von Kantonen zu Grossregionen Kostenersparnisse im öffentlichen Sektor zur Folge haben? Wohlfahrtstheoreti‐sche Argumente betonen steigende Skalenerträge in der Nutzung öffentlicher Leistungen und die Internalisierung von Nutzenspillovers urbaner Zentren als Argumente für Gebietszusammenlegungen. Wer hingegen politisch‐ökonomisch argumentiert, sieht im kleinräumigen und autonomen Schweizer Föderalismus eine Möglichkeit zur Verringerung politischer Verzerrungen durch Begrenzung der staatlichen Monopolmacht. In einer gepoolten Querschnitts‐Zeitreihenanalyse von 1988‐1998 wird der Schweizer Föderalismus anhand von fünf Hypothesen zu den beiden kontroversen Standpunkten diskutiert. Die empirischen Ergebnisse weisen darauf hin, dass die politisch‐ökonomischen Vorteile der starken Dezentralisierung in der Schweiz ihre wohlfahrtstheoretischen Nachteile der Kleinräumigkeit mehr als kompensieren. Direktdemokratische Institutionen spielen dabei eine wichtige Rolle.

SummaryBased on probit estimates, this paper analyzes the effects of fiscal consolidation on the probability of sovereign default in the short run. Using a panel of 104 developing countries from 1980 to 2009 and controlling for various economic, fiscal and political factors, we find that fiscal adjustments in general do not significantly reduce the probability of default even if they are large. Instead, the composition of budget consolidation is decisive in reducing default risk. Expenditure based adjustments are not successful while revenue based adjustments lower the probability of default in the following year by 36 to 55 percent. This finding also holds when economic growth is low or government debt is high as well as when IMF lending is taken into account.

We analyze the effect of budget consolidation on income inequality in 17 OECD countries while controlling for political and ideological differences. We find that the impact of fiscal adjustments on the Gini coefficient does not depend on the political party in power, but on the type of government. Austerity measures by coalition governments significantly reduce income inequality when compared with single party and minority governments, even when they are successful or expenditure based. While coalition governments are less successful in reducing structural budget deficits, they perform much better in terms of addressing distributional concerns. [Copyright Elsevier B.V.]

Based on probit estimates, this paper analyzes the effects of fiscal consolidation on the proba-bility of sovereign defaults in the short run. Using a panel of 104 developing countries from 1980 to 2009 and controlling for various economic, fiscal and political factors, we find that fiscal adjustments in general do not significantly reduce the probably of default even if they are large. Instead, the composition of budget consolidation is decisive in reducing default risk. In contrast to industrialized countries, expenditure based adjustments are not successful while revenue based adjustments lower the probability of default in the following year by 33 to 56 percent. This finding also holds when economic growth is low or government debt is high as well as when IMF lending is taken into account.

After more than five years have passed since the start of the global financial crisis, many European countries are still suffering from financial instability, surging sover- eign debt, economic stagnation or decline, high unemploym ent and political turmoil. We compare consequences and policy measures during Europe's current crisis with those in Japan in the 1990s after the burst of a real estate and asset price bubble. We show that despite marked differences, there are many simila rities both in eco- nomic outcome and policy reactions. Given the complexity, severity and persistence of Europe's multiple crises, the threat of a Lost Decade similar to the one Japan has witnessed may not be unlikely. The paper concludes by presenting some of the les- sons learned from Japan and Europe.