This paper offers three results. First, in line with the previous literature we confirm that fiscal adjustment based mostly on the spending side are less likely to be reversed. Second, spending based fiscal adjustments have caused smaller recessions than tax based fiscal adjustment. Finally, certain combinations of polcies have made it possible for spending based fiscal adjustments to be associated with growth in the economy even on impact rather than with a recession. Thus, expansionary fiscal

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... adjustments are possible. * We thank Jeff Brown, Carlo Favero, Francesco Giavazzi, Paolo Mauro and participants to the 2012 AER session on Fiscal Adjustments for useful comments and Giampaolo Lecce for excellent research assitantship. † Views and conclusions expressed in this paper are those of the author and do not necessarily represent those of Goldman Sachs. The author alone is responsible for any remaining errors. 1 mix such as labor market and goods market liberalization. A sense of "regime change"in which expectations are turned around may also be important and may affect investors' confidence. The present paper builds upon a rich and lively literature based on "episodes". The first paper in this series was by Giavazzi and Pagano (1990) , who studied the experience of Denmark in the early eighties and Ireland at the end of the same decade and argued that these episodes represent cases of "expansionary fiscal adjustments". The argument was that an increase in consumers and investors' confidence, associated with the drastic fiscal change and reflected in a sharp fall in long-term interest rates, compensated the Keynesian effect of tax hikes and spending cuts. A large literature has followed that paper making two points: spending based adjustments are less contractionary and are more likely to lead to a permanent stabilization or a reduction of the debt to GDP ratio; second, in some cases spending based adjustments have been associated with no recession at all, even in the short-run, thus producing an expansionary fiscal adjustment. The first paper looking at the universe of large fiscal adjustments was Alesina and Perotti (1995) . Many other papers followed along similar lines confirming those results. 1 One difficult issue in this literature is how to identify episodes of large discretionary policy changes. Up until a paper by Alesina and Ardagna (2010) the identification criteria was based upon observed outcomes: a large fiscal adjustment was one where the cyclically adjusted primary deficit over GDP ratio fell by a certain amount (normally at least 1.5 per cent of GDP) 2 . The idea was that such a large adjustment in the cyclically adjusted primary deficit was unlikely to be driven by the business cycle and was, instead, an indication of a discretionary active fiscal adjustment package. A recent paper by economists at the IMF (IMF 2010) suggested a different way of identifying large, exogenous fiscal adjustments. Following the narrative approach pioneered by Romer and Romer (2010) they picked cases that according to their criteria were attempts by governments to reduce deficits aggressively. Although the presentation of that paper emphasized the differences with earlier work, the findings were essentially in line with the results summarized by Alesina and Ardagna (2010) in the sense that both agree that spending based adjustments lead to much smaller downturns in output. The IMF study finds that on average, in the episodes their identification technique picks up, adjustments cause in the short-run (modest) recessions. The IMF findings, however, have been revisited and a later IMF paper (Devries et al. 2011), using the same methodology, revised the set of fiscal stabilization episodes (see Favero, Giavazzi and Perego 2011 for a comparison of the results obtained using the two sets of data). About a third of the episodes are reclassified from the 2010 to the 2011 version. We consider the later revisions as the correct and final version of episodes. Alesina, Favero, and Giavazzi (2012) show using the IMF definitions that the results regarding the composition of spending versus tax changes is robust. Spending cuts have been 1