Fiscal Adjustments and Structural Reforms in OECD Countries

Using a panel of 23 advanced economies over the period 1990-2020, this paper investigates the effect of structural reforms and institutional improvements on the probability of starting a fiscal adjustment, as well as on the probability that this fiscal adjustment will be successful and expansionary. We find that labour and product market reforms, institutional improvements in government efficiency, and enhanced financial development and access to money and capital markets have positive effects on the initiation and successful conclusion of a fiscal adjustment. At the same time, these factors increase the probability that a successful fiscal adjustment will also become expansionary, that is, it will lead to an increase in economic activity. The political ideology of the ruling party plays an important role in the interaction between reforms, institutional changes and fiscal adjustments.