Debt Reduction, Fiscal Adjustment, and Growth in Credit-Constrained Economies

Author/Editor:

Emanuele Baldacci ; Sanjeev Gupta ; Carlos Mulas-Granados

Publication Date:

November 22, 2013

Electronic Access:

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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:

This paper assesses the effects of fiscal consolidations associated with public debt reduction on medium-term output growth during periods of private debt deleveraging. The analysis covers 107 countries and 79 episodes of public debt reduction driven by discretionary fiscal adjustments during 1980–2012. It shows that expenditure-based, front-loaded fiscal adjustments can dampen growth when there are credit supply restrictions. Instead, fiscal adjustments that are gradual and rely on a mix of revenue and expenditure measures can support output expansion, while reducing public debt. In this context, protecting public investment is critical for medium-term growth, as is the implementation of supply-side, productivity-enhancing reforms.

Series:

Working Paper No. 2013/238

Subject:

Debt reduction Expenditure Fiscal consolidation Public debt Public investment spending

English

Publication Date:

November 22, 2013

ISBN/ISSN:

9781475516500/1018-5941

Stock No:

WPIEA2013238

Pages:

37

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