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

Author/Editor: Emanuele Baldacci | Sanjeev Gupta | Carlos Mulas-Granados
Authorized for Distribution: November 22, 2013
Electronic Access: Free Full Text (PDF file size is 1,189KB)
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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.
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Series: Working Paper No. 13/238
Subject(s): Public debt | Fiscal consolidation | Debt reduction | Fiscal policy | Credit restraint | Economic growth | Cross country analysis
    Published:   November 22, 2013        
    ISBN/ISSN:   9781475516500/1018-5941   Format:   Paper
    Stock No:   WPIEA2013238   Pages:   37
    Price:   US$18.00
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