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Budget Consolidation: Short-Term Pain and Long-Term Gain

Author/Editor: Laxton, Douglas | Mursula, Susanna | Clinton, Kevin | Kumhof, Michael
Authorized for Distribution: July 1, 2010
Electronic Access: Free Full Text (PDF file size is 929KB)
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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 paper evaluates the costs and benefits of fiscal consolidation using simulations based on the IMFs global DSGE model GIMF. Over the longer run, well-targeted permanent reductions in budget deficits lead to a considerable increase in both the growth rate and the level of output. The gains may be enhanced by shifting some of the tax burden from incomes to consumption. In the short run, credibility plays a crucial role in determining the size of initial output loses. Global current account imbalances would be significantly reduced if budget consolidation was larger in countries with current account deficits.
 
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Series: Working Paper No. 10/163
Subject(s): Budgets | Budget deficits | Current account deficits | Fiscal consolidation | Fiscal policy | Monetary policy | Economic models
 
English  
    Published:   July 1, 2010        
    ISBN/ISSN:   9781455201464   Format:   Paper
    Stock No:   WPIEA2010163   Pages:   25
    Price:   US$18.00
       
     
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