Successful Austerity in the United States, Europe and Japan

 
Author/Editor: Batini, Nicoletta ; Callegari, Giovanni ; Melina, Giovanni
 
Publication Date: July 01, 2012
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: The output effects of 2009 fiscal expansions have been hotly debated. But the discussion of fiscal multipliers is even more relevant now that several European countries have had to quickly retract their stimulus measures in an effort to regain market confidence. Using regime-switching VARs we estimate the impact of fiscal adjustment on the United States, Europe and Japan allowing for fiscal multipliers to vary across recessions and booms. We also estimate ex ante probabilities of recessions derived in association with different-sized and different types of consolidation shocks (expenditure- versus tax-based). We use these estimates to understand how consolidations should be designed to be most effective in terms of permanently and rapidly reducing a country’s debt-to-GDP ratio. The main finding is that smooth and gradual consolidations are to be preferred to frontloaded or aggressive consolidations, especially for economies in recession facing high risk premia on public debt, because sheltering growth is key to the success of fiscal consolidation in these cases.
 
Series: Working Paper No. 12/190
Subject(s): Fiscal consolidation | Fiscal policy | Adjustment process | External shocks | Business cycles | Government expenditures | Public debt | Risk management | France | Italy | Japan | United States

Author's Keyword(s): Fiscal consolidation | fiscal multipliers | growth-friendly fiscal policy
 
English
Publication Date: July 01, 2012
Format: Paper
Stock No: WPIEA2012190 Pages: 60
Price:
US$18.00 (Academic Rate:
US$18.00 )
 
 
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