## _wp10163

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### Introduction and context
- An aggressive fiscal expansion in 2009-10 helped to stabilize the global economy amid contractionary pressures from bursting real estate bubbles, related financial crises, and a sharp tightening of credit.
- Stronger-than-anticipated growth in output since mid-2009 suggests that the fiscal stimulus may have been at least as effective as typical model-based estimates of the short-run multiplier effect had suggested.
- At mid-2010, with private-sector demand picking up, control of budget deficits must move to the front of the policy agenda.
- Government finances in many countries were in need of consolidation even before the steep increase in deficits caused by the response to the recession, and by bailouts of ailing financial institutions and other firms.
- The recent growth rates of public debt, including contingent liabilities, widely exceed that of output, creating concerns that budget deficits on the current scale will not be sustainable over time.
- Even if technically sustainable over the medium term, the growth in debt has negative implications for:
  - the ability of fiscal policy to stabilize the business cycle, and
  - longer-run economic growth.

### Rationale for budget consolidation
- Objectives:
  - Create room for maneuver, or “fiscal space”, by making fiscal deficits more sustainable to provide insurance against future shocks and preserve countercyclical fiscal capacity.
  - Provide a foundation for stronger, more balanced, growth over the longer term by increasing the supply of world savings, lowering the equilibrium world real interest rate, and enabling lower distortionary taxes.
- Key mechanism: The more quickly the credibility of a well-designed deficit reduction policy is established, the smaller any negative short-run impact on the level of economic activity.

### Model overview and structure (GIMF)
- Model: GIMF (Global Integrated Monetary and Fiscal Model), a DSGE model with flexible regional decomposition into six regions used here: United States (US), Japan (JA), Germany (DE), the euro area excluding Germany (EX), emerging Asia (AS) and remaining countries (RC).
- Time units: years.
- Agents and markets:
  - Households: two types
    - Liquidity-constrained (LIQ) households consume their entire after-tax income each year.
    - Overlapping generations (OLG) households maximize utility with finite planning horizons; consumption depends on present discounted value of future income streams with discounting higher than the market interest rate.
  - Firms and unions: multi-layered to capture tradable/nontradable goods, imports at intermediate and final goods levels; nominal rigidities in price and wage setting; real rigidities in investment, retail sales and imports.
  - Financial sector: financial accelerator; entrepreneurs borrow from banks; no traded equity, households receive lump-sum dividend payments; government debt is one-period domestic-currency bonds; banks offer one-period domestic-currency fixed-term deposits; country risk premia enter uncovered interest parity.
  - Asset markets incomplete; optimizing households may issue or purchase internationally tradable U.S.-dollar denominated obligations.
- Non-Ricardian features: liquidity constraints and finite planning horizons imply fiscal policy has non-Ricardian effects—higher short-run multipliers from tax- or transfer-based stimulus and greater long-run crowding-out from higher government debt.

### Households: detailed formulation (key elements)
- OLG households:
  - Population share: 1−ψ.
  - Births each year: N n t (1−ψ) (1−θ n ).
  - Constant probability of death each year: (1−θ), average planning horizon: 1/(1−θ) years.
  - Labor productivity declines at constant rate χ < 1 over working life; productivity Φ a,t = Φ a = κ χ a.
  - Expected utility: sum_{s=0 to ∞} (β θ)^s [ 1/(1−γ) ( (c_{OLG a+s,t+s}/h_{OLG a+s,t+s})^{η_OLG} (1−ℓ_{OLG a+s,t+s})^{1−η_OLG} )^{1−γ} ].
  - Consumption is Dixit-Stiglitz aggregate of retailed consumption goods with elasticity σ_R. Consumption habit given by lagged average per capita consumption.
  - Financial assets: domestic government bonds B_{a,t}, deposits B_N a,t + B_T a,t, U.S.-dollar bonds valued E_t F_{a,t}.
  - Participation requires insurer premium (1−θ)/θ on household financial wealth; at death wealth left to insurer and redistributed to survivors.
  - Pre-tax labor income: W_t Φ_{a,t} ℓ_{a,t}. Taxes: τ_{L,t}, τ_{c,t}, lump-sum τ_{ls,OLG a,t}. Transfers Υ_{OLG a,t}. Retail price P_R t and distributor price P_t appear in budget.
  - Budget constraint (nominal) presented in the model text.
  - Consumption optimality depends on real aggregate financial wealth f w_t and non-financial wealth h w_L t + h w_K t; marginal propensity to consume out of wealth depends on real interest rates and consumption tax paths.
  - Fiscal stimulus via initially lower taxes and permanent increase in debt tilts tax profile; perceived increase in human wealth for households with finite horizons increases current consumption; long-run higher government debt crowds out private capital and net foreign assets via lower world saving and higher world real interest rate plus non-Ricardian incomplete offset by private saving.
  - Intertemporal elasticity of substitution: 1/γ; for conventional γ > 1, income effect of higher real interest rate increases marginal propensity to consume out of wealth; larger γ requires larger interest rate changes to clear markets after fiscal shocks.
- LIQ households:
  - Objective identical to OLG households but consumption ≤ current income (after-tax wage + net transfers).
  - Budget constraint: c_{LIQ t} (P_R t + P_t τ_{c,t}) = ℓ_{LIQ t} W_t (1−τ_{L,t}) + P_t Υ_{LIQ t} − P_t τ_{ls,LIQ t}.
  - High marginal propensity to consume out of income implies particularly high fiscal multipliers for tax cuts and transfer increases when LIQ share is high.
- Aggregate:
  - Aggregate consumption ˇC_t = ˇc_{OLG t} + ˇc_{LIQ t}.
  - Aggregate labor ˇL_t = ˇℓ_{OLG t} + ˇℓ_{LIQ t}.

### Firms, financial sector, and government (key features)
- Firms:
  - Entrepreneurs, capital goods producers, manufacturers, distributors, retailers; monopolistic competition (except capital goods producers, entrepreneurs, retailers); nominal price rigidities; capital accumulation with adjustment costs; retailers face sales adjustment costs; import adjustment costs create lags in import response.
  - Distributors combine public capital (free) with manufacturing output; public capital augments distribution productivity.
- Financial sector:
  - Based on Bernanke et al. (1999) and Christiano et al. (2007).
  - Entrepreneurs finance capital with net worth + bank loans; loans risky due to idiosyncratic productivity risk; entrepreneurs risk-neutral and bear aggregate risk under state-contingent loan contract; bankrupt entrepreneurs cede capital to banks but banks recover only fraction of fair value.
  - Banks earn zero profits in each state: fixed depositor rate equals stochastic lending return net of bankruptcies and monitoring costs.
  - External finance premium = entrepreneur lending rate less bank deposit rate; increases with borrower leverage; nonlinear setup yields increasing marginal effect on risk premium from net worth shocks.
- Government:
  - Fiscal instruments: G_t = G_{cons t} + G_{inv t}; lump-sum taxes τ_{ls,t} = τ_{ls,OLG t} + τ_{ls,LIQ t}; transfers Υ_t; tax rates τ_{L,t}, τ_{c,t}, τ_{k,t}.
  - Government consumption unproductive; government investment augments public infrastructure capital depreciating at δ_G.
  - Real normalized government budget constraint: ˇb_t = (i_{t−1}/π_t^{gn}) ˇb_{t−1} + ˇG_t + ˇΥ_t − ˇτ_t = (i_{t−1}/π_t^{gn}) ˇb_{t−1} − ˇs_t, where ˇs_t is primary surplus.
  - Fiscal policy rule: stabilizes interest-inclusive government deficit to GDP ratio gdrat_t at long-run level gdssrat_t and stabilizes business cycle via deficit response to output gap: gdrat_t = gdssrat_t − d_gdp ln( g ˇdp_t / g ˇdp_{pot} ).
  - Definitions and relation between debt and deficit targets provided in model text.
  - Automatic stabilizer coefficient d_gdp ≥ 0; potential output g ˇd p_{pot} modeled as moving average of past actual GDP.
  - Default instrument in paper: general transfers ˇΥ_t.
- Monetary policy:
  - Interest rate rule responds to one-year-ahead inflation, with equilibrium real interest rate formulated as moving average similar to potential output.

### Calibration (selected parameters)
- Real per capita growth rate: 1.5 percent.
- World population growth rate: 1 percent.
- Long-run real interest rate: 3 percent.
- Intertemporal elasticity of substitution: 0.2 5 (γ = 4).
- Wage elasticity of labor supply: 0.5.
- Shares of liquidity-constrained agents: 25 percent in US, JA, DE and EX; 50 percent in AS.
- Average remaining time at work: 20 years (χ = 0.95).
- Planning horizon: 20 years (θ = 0.95).
- Calibration target for θ and χ implies a long-run effect of a one percentage point increase in government debt to GDP ratio on U.S. real interest rate of about one basis point (lower end of empirical range one to 6 basis points).
- Elasticities of substitution:
  - Between capital and labor: 1.
  - Between domestic and foreign goods: 0.7 5.
  - Between tradables and nontradables: 0.5.
- Steady-state gross markups:
  - Manufacturing and wage setting: 1.1.
  - Retailing, investment and consumption goods production: 1.0 5.
  - Import agents: 1.0 25.
- Public capital depreciation rate δ_G: 4 percent per year.
- Elasticity of aggregate output with respect to public capital: 0.14.
- Financial sector calibration: leverage (corporate debt to equity) = 100 percent in all sectors/regions; steady-state external finance premium = 2.5 percent.
- Fiscal rule parameters: target deficit-to-GDP ratios consistent with historically observed ratios; OECD estimates used for d_gdp; region-specific monetary rule parameters estimated on annual data.

### Fiscal consolidation scenarios (design and implementation)
- Objective: explore consequences of worldwide fiscal consolidation on growth and current account imbalances.
- Consolidation assumed worldwide with regionally differentiated sizes:
  - Standardized deficit reduction for largest assumed programs (US and Japan): 1 percent of pre-consolidation GDP.
  - Implementation gradual over four years.
  - Scaling factors for remaining regions applied to all components of U.S./Japan packages:
    - Euro area excluding Germany (EX): 0.83.
    - Germany (DE): 0.33.
    - Remaining countries (RC): 0.33.
    - Emerging Asia (AS): 0.
- Two experiment types:
  - Pure fiscal consolidation.
  - Fiscal consolidation accompanied by growth-supporting tax reform.
- Stylized components (described for US and Japan; same scaling factors applied elsewhere):
  - Fiscal consolidation accomplished by permanent cut in general transfers equal to 0.5 percent of pre-consolidation GDP, and a permanent cut in government consumption equal to 0.33 percent of pre-consolidation GDP. To maintain the interest-inclusive government deficit target, labor and capital income taxes are adjusted as described below.

### Fiscal consolidation mechanics and tax response
- Targeted improvement in the interest-inclusive government deficit: 1 percent of pre-consolidation GDP.
- Labor and capital income taxes are adjusted by equal amounts in terms of percentage point changes in their tax rates to achieve the targeted 1 percent improvement.
- Short-run implication: income taxes have to increase slightly initially because the reduction in the primary deficit must equal the reduction in the overall deficit at the outset.
- Medium- to long-run implication: as debt falls, the real interest rate on debt falls and debt servicing costs eventually fall by more than 1 percent of pre-consolidation GDP, allowing labor and capital income taxes to fall substantially over time.

### Fiscal consolidation accompanied by tax reform
- Adds a redistribution of tax burden away from income (capital and labor) and towards consumption.
- Assumption: United States and Japan increase consumption tax revenue by 1.7 percent of pre-consolidation GDP, corresponding to a long-run increase in the consumption tax rate of over 2.5 percentage points.
- With additional consumption tax revenue, labor and capital income taxes:
  - Can fall immediately (given the additional revenue).
  - Fall much more substantially in the long run compared to the non-reform scenario.
- Public-finance rationale: consumption taxes are less distortionary than labor and especially than capital income taxes, because capital is in perfectly elastic supply in the long run, labor supply elasticity is intermediate, and consumption demand is fairly inelastic.

### Credibility, timing, and dynamic presentation
- Credibility assumption in baseline scenarios:
  - Program becomes credible only after all components are fully enacted, i.e., in year four.
  - In each prior year agents assume the program will be discontinued in the following year (no credibility).
- Alternative scenarios explored with higher or lower credibility (e.g., credibility in year three or year five).
- Impulse response presentation:
  - Lines for the first 20 years.
  - Bars representing outcomes at the 40- and 60-year horizons.
- Dynamics are very long-lived: changes in flows (government deficits and current account deficits) take several decades to be fully reflected in stocks (government debt and net foreign liabilities).

### Global aggregate effects on growth, interest rates, and debt
- Combined consolidation: raises global government surpluses by around 0.5 percent of world GDP.
- Model steady-state nominal growth rates assumed: around 5 percent.
  - Implied eventual decline in government debt-to-GDP ratios: around 10 percentage points.
- World real interest rate decline:
  - Around 60 and 80 basis points in the two scenarios (fiscal consolidation without and with tax reform).
  - Over the 5- to 20-year horizon: interest rates drop by 15 to 40 basis points.
- Output (long-run):
  - Fiscal consolidation alone: over 2.5 percent relative to baseline.
  - Fiscal consolidation combined with tax reform: almost 4 percent relative to baseline.
- Long-run tax cuts:
  - With tax reform: around 5 percentage points.
  - Without tax reform: around 2.5 percentage points.
- Difference in very long-run real interest rates between packages: around 15 basis points.
- Private saving increases substantially more in presence of tax reform.

### Short-run costs, credibility, and regional dynamics
- Short-run multipliers create initial output losses until credibility is established.
- Duration of negative-output phase:
  - Pure fiscal consolidation: lasts for seven years.
  - Fiscal consolidation with tax reform: lasts for 5 years.
- If program credibility is established in year three instead of year four:
  - Substantial drop in short-run costs for most regions.
  - Return to positive growth occurs one year earlier in many regions.
  - In emerging Asia, higher credibility in year three can reduce output further in that year due to large appreciation effects.
- If full credibility existed from year one:
  - There would be no short-run loss of output, as the anticipated switch from income to consumption taxes would have immediate positive short-run effects.
- Regional short-run observations:
  - Initial output losses on announcement, trough in year 3 for most regions (except emerging Asia).
  - Initial output losses largest (around 0.2-0.3 percent relative to baseline) in regions with the largest consolidations.
  - Germany’s recovery particularly rapid due to an additional monetary stimulus from EMU membership.
  - Emerging Asia and remaining countries recover more slowly due to strong real appreciations and depressed export sectors.

### Long-run gains: levels, investment, and consumption
- United States under full package: real GDP 1.4 percent above baseline in year 10.
- Long-run gains by region (by year 10 and beyond):
  - Advanced economies: between 5 and 6 percent relative to baseline in the long run.
  - Emerging Asia: in the long run gains 2.5 percent relative to baseline; by year 10 GDP has not yet recovered to baseline.
  - Remaining country group: GDP not quite 0.5 percent above baseline by year 10.
  - Euro area and Japan show somewhat stronger gains than the United States; Germany shows somewhat weaker gains due to smaller fiscal package.
- Tax reform increases long-run output gains by roughly a quarter to a half relative to consolidation without tax reform.
- Consumption behavior:
  - In U.S. and euro area excluding Germany: consumption initially drops and takes about 8 years to return to baseline.
  - In Japan: consumption takes about 15 years to return to baseline.
  - Regions with small or no consolidation: consumption flat for first three years then rises as packages become credible.
- Investment behavior:
  - Initially fairly flat in all regions, then booms once credibility is established.
  - Year 10 investment levels above baseline:
    - United States: 5.2 per cent above baseline.
    - Euro area (including Germany): almost 5 percent above baseline.
    - Japan: about 4 percent above baseline.
    - Remaining country group: about 3 percent above baseline.
    - Emerging Asia: less than 2 percent above baseline.

### External imbalances, savings, and exchange rates
- Private dissaving does not offset higher government saving due to non-Ricardian household behavior.
- Tax reform reduces marginal propensity to consume (due to higher consumption taxes) but increases income (due to lower income taxes), significantly increasing private saving rates in several regions.
- World real interest rate drops by between 60 and 80 basis points, contributing to investment boom.
- Current account movements (scenario with tax reform):
  - United States current account improves by around 0.3 percentage points of GDP.
  - Euro area excluding Germany improves by around 0.5 percentage points of GDP.
  - Japan improves by around 0.5 percentage points of GDP.
  - Germany deteriorates by 0.4 percentage points of GDP.
  - Remaining countries deteriorate by 0.3 percentage points of GDP.
  - Emerging Asia deteriorates by 0.7 percentage points of GDP.
- Real effective exchange rates:
  - Largest real effective depreciation happens in Japan: around 4 percent after 10 years and beyond.
  - United States experiences a similar-sized depreciation (given same assumed consolidation as Japan).
  - Euro area excluding Germany depreciation is about half the size of Japan’s.
  - Remaining regions experience corresponding real appreciations.

### Effects of different fiscal instruments (consolidation = 1 percent of pre-consolidation GDP)
- Spending-based consolidation (one instrument at a time; tax rates held constant):
  - General transfers (reinterpretable as negative lump-sum taxes): best spending-based result.
    - Long-run output gains of around 1 to 2 percent in advanced consolidating regions (versus around 5 percent in baseline with tax reform).
    - Output recovers to baseline in around 6 or 7 years.
    - Current account movements at least 50 percent larger compared to other spending instruments.
  - Government investment cuts: worst outcome.
    - Immediate and permanent output drop.
    - Long-run GDP in largest consolidating regions drops 5 percent below baseline.
  - Government consumption and targeted transfers: intermediate outcomes.
    - Prolonged period of output below baseline but by significantly less than 1 percent; long-run effects very close to zero.
- Tax-based consolidation (lump-sum versus distortionary taxes):
  - Lump-sum taxes: most beneficial effect on GDP (short run and long run).
  - Distortionary taxes:
    - Consumption taxes: least distortionary among distortionary taxes, but recovery to baseline in advanced consolidating regions takes between 10 and 20 years.
    - Labor income taxes: recovery period roughly twice as long as consumption taxes; long-run effect close to zero or slightly positive.
    - Capital income taxes: cause immediate and permanent output losses (at around 0.5 percent to 1 percent).
- Mechanisms and policy lessons:
  - Government investment cuts and capital income tax increases progressively worsen the capital stock (public or private), producing prolonged negative growth.
  - Higher income taxes reduce the private saving rate and therefore reduce current account surpluses generated by consolidation.
  - Fiscal consolidation that raises capital income taxes or reduces government investment is very harmful to growth (short and long run); higher labor income taxes are also harmful for a prolonged period.
  - Consolidation aimed at sustainable growth should be structured so income taxes can fall and government investment can rise, while other instruments reduce the deficit.
  - Consolidation through lower unproductive government spending or higher consumption taxes has smaller but non-negligible negative short-run multipliers and close to zero long-run effects.
  - Consolidation through reductions in transfers can be attractive from growth and external imbalances perspectives, but cuts to transfers for liquidity-constrained households have effects almost exactly as large as lower government consumption; best results come from entitlement cuts that affect unconstrained agents as much as possible.

### Conclusions
- Fiscal consolidation entails a trade-off between short-run pain and long-run gain:
  - Short-run pain arises from negative multipliers of lower spending or higher taxes.
  - Long-run gain arises from lower world real interest rates and lower distortionary taxes associated with lower debt levels.
- Key qualifications:
  - A well-designed, growth-friendly fiscal package reduces long-run pain and short-run costs, with the duration of pain tied closely to the period needed to establish credibility.
  - A poorly designed package (e.g., sharply higher income taxes or cuts to essential government investment) can eliminate or reverse long-run gains.
- On global current accounts:
  - Fiscal consolidation concentrated in regions with large external imbalances contributes to reducing current account deficits (with the exception of Japan, whose current account surplus may improve further).
  - Growth-friendly tax reform tends to increase private savings rates, which helps in rebalancing external positions.

*Source: Excerpt from provided PDF content.*

### References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22

### _wp10163 - References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

### Introduction and context
- An aggressive fiscal expansion in 2009-10 helped to stabilize the global economy amid contractionary pressures from bursting real estate bubbles, related financial crises, and a sharp tightening of credit.
- Stronger-than-anticipated growth in output since mid-2009 suggests that the fiscal stimulus may have been at least as effective as typical model-based estimates of the short-run multiplier effect had suggested.
- At mid-2010, with private-sector demand picking up, control of budget deficits must move to the front of the policy agenda.
- Government finances in many countries were in need of consolidation even before the steep increase in deficits caused by the response to the recession, and by bailouts of ailing financial institutions and other firms.
- The recent growth rates of public debt, including contingent liabilities, widely exceed that of output, creating concerns that budget deficits on the current scale will not be sustainable over time.
- Even if technically sustainable over the medium term, the growth in debt has negative implications for:
  - the ability of fiscal policy to stabilize the business cycle, and
  - longer-run economic growth.

### Rationale for budget consolidation
- Two main aspects:
  - Create room for maneuver, or “fiscal space”, by making fiscal deficits more sustainable.
    - This would provide insurance against future shocks by maintaining the ability of fiscal policy to respond in a countercyclical fashion when the next recession arrives.
  - Provide a foundation for stronger, more balanced, growth over the longer term.
    - Deficit reduction in the major economies, by increasing the supply of world savings, would lower the equilibrium world real interest rate.
    - It would also enable distortionary taxes to be lowered in the longer run, especially if accompanied by a switch to less distortionary forms of taxation.
    - Both effects would have positive longer-run impacts on investment and growth.
- The more quickly the credibility of a well-designed deficit reduction policy is established, the smaller any negative short-run impact on the level of economic activity.

### Design and composition of deficit reduction
- Deficit reduction generally involves changes to multiple items on both the revenue and spending sides.
- Each policy variable has different effects on:
  - the level of investment,
  - household wealth,
  - labor supply,
  - the current account deficit, etc.
- The heightened risk of a prolonged period of slow growth after the financial crisis and recession strengthens the case for a growth-friendly mix of deficit reduction.
- The existence of large, chronic, current account imbalances suggests a need for larger fiscal consolidation measures in countries with external deficits.

### Figures list (as presented)
- 1. Scenarios: Tax Rates (page 23)
- 2. Global Effects (page 24)
- 3. Short-Run Costs and Credibility (page 25)
- 4. Long-Run Gains: Output and Inflation (page 26)
- 5. Long-Run Gains: Domestic Absorption (page 27)
- 6. Long-Run Gains: Foreign Trade (page 28)
- 7. External Imbalances: Saving, Investment and Current Account (page 29)
- 8. External Imbalances: Asset Stocks (page 30)
- 9. External Imbalances: Exchange Rates (page 31)
- 10. Different Fiscal Instruments: Spending (page 32)
- 11. Different Fiscal Instruments: Taxes (page 33)

*Source: _wp10163 - References . . . . . . . . . . . . . . . . . . . . . . . . . 22*

### Chapter 1 of the April 2010World Economic Outlookdescribes recent output performance. Freedman and

### _wp10163 - Chapter 1 of the April 2010World Economic Outlookdescribes recent output performance. Freedman and

### Model overview and structure
- Model: GIMF (Global Integrated Monetary and Fiscal Model), a DSGE model of the world economy with flexible regional decomposition into up to six regions:
  - Regions defined for this paper: United States (US), Japan (JA), Germany (DE), the euro area excluding Germany (EX), emerging Asia (AS) and remaining countries (RC).
- Time units represent years.
- Agents and markets:
  - Households: two types
    - Liquidity-constrained (LIQ) households consume their entire after-tax income each year.
    - Overlapping generations (OLG) households maximize utility with finite planning horizons; consumption depends on present discounted value of future income streams with discounting higher than the market interest rate due to finite horizons and lifecycle effects.
  - Firms and unions: multi-layered to capture tradable/nontradable goods, imports at intermediate and final goods levels; nominal rigidities in price and wage setting; real rigidities in investment, retail sales and imports.
  - Financial sector: financial accelerator; entrepreneurs borrow from banks; no traded equity, households receive lump-sum dividend payments; government debt is one-period domestic-currency bonds; banks offer one-period domestic-currency fixed-term deposits; country risk premia enter uncovered interest parity.
  - Asset markets incomplete; optimizing households may issue or purchase internationally tradable U.S.-dollar denominated obligations.
- Non-Ricardian features: liquidity constraints and finite planning horizons imply fiscal policy has non-Ricardian effects—higher short-run multipliers from tax- or transfer-based stimulus and greater long-run crowding-out from higher government debt.

### Households: detailed formulation
- OLG households:
  - Population share: 1−ψ.
  - Births each year: N n t (1−ψ) (1−θ n ).
  - Constant probability of death each year: (1−θ), average planning horizon: 1/(1−θ) years.
  - Labor productivity declines at constant rate χ < 1 over working life; productivity Φ a,t = Φ a = κ χ a.
  - Expected utility: sum_{s=0 to ∞} (β θ)^s [ 1/(1−γ) ( (c_{OLG a+s,t+s}/h_{OLG a+s,t+s})^{η_OLG} (1−ℓ_{OLG a+s,t+s})^{1−η_OLG} )^{1−γ} ].
  - Consumption is Dixit-Stiglitz aggregate of retailed consumption goods with elasticity σ_R. Consumption habit given by lagged average per capita consumption.
  - Financial assets: domestic government bonds B_{a,t}, deposits B_N a,t + B_T a,t, U.S.-dollar bonds valued E_t F_{a,t}.
  - Participation requires insurer premium (1−θ)/θ on household financial wealth; at death wealth left to insurer and redistributed to survivors.
  - Pre-tax labor income: W_t Φ_{a,t} ℓ_{a,t}. Taxes: τ_{L,t}, τ_{c,t}, lump-sum τ_{ls,OLG a,t}. Transfers Υ_{OLG a,t}. Retail price P_R t and distributor price P_t appear in budget.
  - Budget constraint (nominal): P_R t c_{OLG a,t} + P_t c_{OLG a,t} τ_{c,t} + P_t τ_{ls,OLG a,t} + B_{a,t} + B_{N a,t} + B_{T a,t} + E_t F_{a,t} = (1/θ)[ (1+i_{t−1}) (B_{a−1,t−1}+B_{N a−1,t−1}+B_{T a−1,t−1}) + i^*_ {t−1} E_t F_{a−1,t−1} ]/(1+ξ_{f t−1}) + W_t Φ_{a,t} ℓ_{OLG a,t} (1−τ_{L,t}) + ∑_j ∫_0^1 D_{j a,t}(i) di + P_t rbr_{a,t} + P_t Υ_{OLG a,t}.
  - Consumption optimality depends on real aggregate financial wealth f w_t and non-financial wealth h w_L t + h w_K t; marginal propensity to consume out of wealth depends on real interest rates and consumption tax paths.
  - Fiscal stimulus via initially lower taxes and permanent increase in debt tilts tax profile; perceived increase in human wealth for households with finite horizons increases current consumption; long-run higher government debt crowds out private capital and net foreign assets via lower world saving and higher world real interest rate plus non-Ricardian incomplete offset by private saving.
  - Intertemporal elasticity of substitution: 1/γ; for conventional γ > 1, income effect of higher real interest rate increases marginal propensity to consume out of wealth; larger γ requires larger interest rate changes to clear markets after fiscal shocks.
- LIQ households:
  - Objective identical to OLG households but consumption ≤ current income (after-tax wage + net transfers).
  - Budget constraint: c_{LIQ t} (P_R t + P_t τ_{c,t}) = ℓ_{LIQ t} W_t (1−τ_{L,t}) + P_t Υ_{LIQ t} − P_t τ_{ls,LIQ t}.
  - High marginal propensity to consume out of income implies particularly high fiscal multipliers for tax cuts and transfer increases when LIQ share is high.
- Aggregate:
  - Aggregate consumption ˇC_t = ˇc_{OLG t} + ˇc_{LIQ t}.
  - Aggregate labor ˇL_t = ˇℓ_{OLG t} + ˇℓ_{LIQ t}.

### Firms, financial sector, and government
- Firms:
  - Entrepreneurs, capital goods producers, manufacturers, distributors, retailers; monopolistic competition (except capital goods producers, entrepreneurs, retailers); nominal price rigidities; capital accumulation with adjustment costs; retailers face sales adjustment costs; import adjustment costs create lags in import response.
  - Distributors combine public capital (free) with manufacturing output; public capital augments distribution productivity.
- Financial sector:
  - Based on Bernanke et al. (1999) and Christiano et al. (2007).
  - Entrepreneurs finance capital with net worth + bank loans; loans risky due to idiosyncratic productivity risk; entrepreneurs risk-neutral and bear aggregate risk under state-contingent loan contract; bankrupt entrepreneurs cede capital to banks but banks recover only fraction of fair value.
  - Banks earn zero profits in each state: fixed depositor rate equals stochastic lending return net of bankruptcies and monitoring costs.
  - External finance premium = entrepreneur lending rate less bank deposit rate; increases with borrower leverage; nonlinear setup yields increasing marginal effect on risk premium from net worth shocks.
- Government:
  - Fiscal instruments: G_t = G_{cons t} + G_{inv t}; lump-sum taxes τ_{ls,t} = τ_{ls,OLG t} + τ_{ls,LIQ t}; transfers Υ_t; tax rates τ_{L,t}, τ_{c,t}, τ_{k,t}.
  - Government consumption unproductive; government investment augments public infrastructure capital depreciating at δ_G.
  - Real normalized government budget constraint: ˇb_t = (i_{t−1}/π_t^{gn}) ˇb_{t−1} + ˇG_t + ˇΥ_t − ˇτ_t = (i_{t−1}/π_t^{gn}) ˇb_{t−1} − ˇs_t, where ˇs_t is primary surplus.
  - Fiscal policy rule stabilizes interest-inclusive government deficit to GDP ratio gdrat_t at long-run level gdssrat_t and stabilizes business cycle via deficit response to output gap: gdrat_t = gdssrat_t − d_gdp ln( g ˇdp_t / g ˇdp_{pot} ).
  - Definitions:
    - gdrat_t = 100 ( (i_{t−1} − 1) ˇb_{t−1}/π_t^{gn} − ˇs_t ) / g ˇdp_t = 100 ( ˇb_t − ˇb_{t−1}/π_t^{gn} ) / g ˇdp_t.
    - Relation between debt and deficit targets: bssrat_t = (πgn/(πgn−1)) gdssrat_t, where π is inflation target; implied long-run autoregressive coefficient on debt is 1/(πgn), close to one.
  - Automatic stabilizer coefficient d_gdp ≥ 0; potential output g ˇd p_{pot} modeled as moving average of past actual GDP to allow gap closure.
  - Default instrument in paper: general transfers ˇΥ_t.
- Monetary policy:
  - Interest rate rule responds to one-year-ahead inflation, with equilibrium real interest rate formulated as moving average similar to potential output.

### Calibration (key parameters)
- Real per capita growth rate: 1.5 percent.
- World population growth rate: 1 percent.
- Long-run real interest rate: 3 percent.
- Intertemporal elasticity of substitution: 0.2 5 (γ = 4).
- Wage elasticity of labor supply: 0.5.
- Shares of liquidity-constrained agents: 25 percent in US, JA, DE and EX; 50 percent in AS.
- Average remaining time at work: 20 years (χ = 0.95).
- Planning horizon: 20 years (θ = 0.95).
- Calibration target for θ and χ implies a long-run effect of a one percentage point increase in government debt to GDP ratio on U.S. real interest rate of about one basis point (lower end of empirical range one to 6 basis points).
- Elasticities of substitution:
  - Between capital and labor: 1.
  - Between domestic and foreign goods: 0.7 5.
  - Between tradables and nontradables: 0.5.
- Steady-state gross markups:
  - Manufacturing and wage setting: 1.1.
  - Retailing, investment and consumption goods production: 1.0 5.
  - Import agents: 1.0 25.
- Public capital depreciation rate δ_G: 4 percent per year (Kamps (2004)).
- Elasticity of aggregate output with respect to public capital: 0.14 (Ligthart and Suárez (2005)) incorporated via distribution sector productivity.
- Financial sector calibration: leverage (corporate debt to equity) = 100 percent in all sectors/regions; steady-state external finance premium = 2.5 percent.
- Fiscal rule parameters: target deficit-to-GDP ratios consistent with historically observed ratios; OECD estimates used for d_gdp; region-specific monetary rule parameters estimated on annual data.

### Fiscal consolidation scenarios (design and implementation)
- Objective: explore consequences of worldwide fiscal consolidation on growth and current account imbalances.
- Consolidation assumed worldwide with regionally differentiated sizes:
  - Standardized deficit reduction for largest assumed programs (US and Japan): 1 percent of pre-consolidation GDP.
  - Implementation gradual over four years.
  - Scaling factors for remaining regions applied to all components of U.S./Japan packages:
    - Euro area excluding Germany (EX): 0.83.
    - Germany (DE): 0.33.
    - Remaining countries (RC): 0.33.
    - Emerging Asia (AS): 0.
- Two experiment types:
  - Pure fiscal consolidation.
  - Fiscal consolidation accompanied by growth-supporting tax reform.
- Stylized components (described for US and Japan; same scaling factors applied elsewhere):
  - Fiscal consolidation accomplished by permanent cut in general transfers equal to 0.5 percent of pre-consolidation GDP, and a permanent cut in government consumption equal to [text ends].

*Source: _wp10163 - Chapter 1 of the April 2010World Economic Outlookdescribes recent output performance. Freedman and*

### 0.33 percent of pre-consolidation GDP. To maintain the interest-inclusive government deficit

### _wp10163 - 0.33 percent of pre-consolidation GDP. To maintain the interest-inclusive government deficit

### Fiscal consolidation mechanics and tax response
- Targeted improvement in the interest-inclusive government deficit: 1 percent of pre-consolidation GDP.
- Labor and capital income taxes are adjusted by equal amounts in terms of percentage point changes in their tax rates to achieve the targeted 1 percent improvement.
- Short-run implication: income taxes have to increase slightly initially because the reduction in the primary deficit must equal the reduction in the overall deficit at the outset.
- Medium- to long-run implication: as debt falls, the real interest rate on debt falls and debt servicing costs eventually fall by more than 1 percent of pre-consolidation GDP, allowing labor and capital income taxes to fall substantially over time.

### Fiscal consolidation accompanied by tax reform
- Adds a redistribution of tax burden away from income (capital and labor) and towards consumption.
- Assumption: United States and Japan increase consumption tax revenue by 1.7 percent of pre-consolidation GDP, corresponding to a long-run increase in the consumption tax rate of over 2.5 percentage points.
- With additional consumption tax revenue, labor and capital income taxes:
  - Can fall immediately (given the additional revenue).
  - Fall much more substantially in the long run compared to the non-reform scenario.
- Public-finance rationale: consumption taxes are less distortionary than labor and especially than capital income taxes, because capital is in perfectly elastic supply in the long run, labor supply elasticity is intermediate, and consumption demand is fairly inelastic.

### Credibility, timing, and dynamic presentation
- Credibility assumption in baseline scenarios:
  - Program becomes credible only after all components are fully enacted, i.e., in year four.
  - In each prior year agents assume the program will be discontinued in the following year (no credibility).
- Alternative scenarios explored with higher or lower credibility (e.g., credibility in year three or year five).
- Impulse response presentation:
  - Lines for the first 20 years.
  - Bars representing outcomes at the 40- and 60-year horizons.
- Dynamics are very long-lived: changes in flows (government deficits and current account deficits) take several decades to be fully reflected in stocks (government debt and net foreign liabilities).

### Global aggregate effects on growth, interest rates, and debt
- Combined consolidation: raises global government surpluses by around 0.5 percent of world GDP.
- Model steady-state nominal growth rates assumed: around 5 percent.
  - Implied eventual decline in government debt-to-GDP ratios: around 10 percentage points.
- World real interest rate decline:
  - Around 60 and 80 basis points in the two scenarios (fiscal consolidation without and with tax reform).
  - Over the 5- to 20-year horizon: interest rates drop by 15 to 40 basis points.
- Output (long-run):
  - Fiscal consolidation alone: over 2.5 percent relative to baseline.
  - Fiscal consolidation combined with tax reform: almost 4 percent relative to baseline.
- Long-run tax cuts:
  - With tax reform: around 5 percentage points.
  - Without tax reform: around 2.5 percentage points.
- Difference in very long-run real interest rates between packages: around 15 basis points.
- Private saving increases substantially more in presence of tax reform.

### Short-run costs, credibility, and regional dynamics
- Short-run multipliers create initial output losses until credibility is established.
- Duration of negative-output phase:
  - Pure fiscal consolidation: lasts for seven years.
  - Fiscal consolidation with tax reform: lasts for 5 years.
- If program credibility is established in year three instead of year four:
  - Substantial drop in short-run costs for most regions.
  - Return to positive growth occurs one year earlier in many regions.
  - In emerging Asia, higher credibility in year three can reduce output further in that year due to large appreciation effects.
- If full credibility existed from year one:
  - There would be no short-run loss of output, as the anticipated switch from income to consumption taxes would have immediate positive short-run effects.
- Regional short-run observations:
  - Initial output losses on announcement, trough in year 3 for most regions (except emerging Asia).
  - Initial output losses largest (around 0.2-0.3 percent relative to baseline) in regions with the largest consolidations.
  - Germany’s recovery particularly rapid due to an additional monetary stimulus from EMU membership.
  - Emerging Asia and remaining countries recover more slowly due to strong real appreciations and depressed export sectors.

### Long-run gains: levels, investment, and consumption
- United States under full package: real GDP 1.4 percent above baseline in year 10.
- Long-run gains by region (by year 10 and beyond):
  - Advanced economies: between 5 and 6 percent relative to baseline in the long run.
  - Emerging Asia: in the long run gains 2.5 percent relative to baseline; by year 10 GDP has not yet recovered to baseline.
  - Remaining country group: GDP not quite 0.5 percent above baseline by year 10.
  - Euro area and Japan show somewhat stronger gains than the United States; Germany shows somewhat weaker gains due to smaller fiscal package.
- Tax reform increases long-run output gains by roughly a quarter to a half relative to consolidation without tax reform.
- Consumption behavior:
  - In U.S. and euro area excluding Germany: consumption initially drops and takes about 8 years to return to baseline.
  - In Japan: consumption takes about 15 years to return to baseline.
  - Regions with small or no consolidation: consumption flat for first three years then rises as packages become credible.
- Investment behavior:
  - Initially fairly flat in all regions, then booms once credibility is established.
  - Year 10 investment levels above baseline:
    - United States: 5.2 per cent above baseline.
    - Euro area (including Germany): almost 5 percent above baseline.
    - Japan: about 4 percent above baseline.
    - Remaining country group: about 3 percent above baseline.
    - Emerging Asia: less than 2 percent above baseline.

### External imbalances, savings, and exchange rates
- Private dissaving does not offset higher government saving due to non-Ricardian household behavior.
- Tax reform reduces marginal propensity to consume (due to higher consumption taxes) but increases income (due to lower income taxes), significantly increasing private saving rates in several regions.
- World real interest rate drops by between 60 and 80 basis points, contributing to investment boom.
- Current account movements (scenario with tax reform):
  - United States current account improves by around 0.3 percentage points of GDP.
  - Euro area excluding Germany improves by around 0.5 percentage points of GDP.
  - Japan improves by around 0.5 percentage points of GDP.
  - Germany deteriorates by 0.4 percentage points of GDP.
  - Remaining countries deteriorate by 0.3 percentage points of GDP.
  - Emerging Asia deteriorates by 0.7 percentage points of GDP.
- Real effective exchange rates:
  - Largest real effective depreciation happens in Japan: around 4 percent after 10 years and beyond.
  - United States experiences a similar-sized depreciation (given same assumed consolidation as Japan).
  - Euro area excluding Germany depreciation is about half the size of Japan’s.
  - Remaining regions experience corresponding real appreciations.

### Effects of different fiscal instruments (consolidation = 1 percent of pre-consolidation GDP)
- Spending-based consolidation scenarios (one instrument used at a time; tax rates held constant):
  - General transfers (reinterpretable as negative lump-sum taxes): best spending-based result.
    - Long-run output gains of around 1 to 2 percent in advanced consolidating regions (versus around 5 percent in baseline with tax reform).
    - Output recovers to baseline in around 6 or 7 years.
    - Current account movements at least 50 percent larger compared to other spending instruments (provides more powerful stimulus to private saving rates).
  - Government investment cuts: worst outcome.
    - Immediate and permanent output drop.
    - Long-run GDP in largest consolidating regions drops 5 percent below baseline.
  - Government consumption and targeted transfers: intermediate outcomes.
    - Prolonged period of output below baseline but by significantly less than 1 percent; long-run effects very close to zero.
- Tax-based consolidation scenarios (lump-sum versus distortionary taxes):
  - Lump-sum taxes: most beneficial effect on GDP (short run and long run).
  - Distortionary taxes:
    - Consumption taxes: least distortionary among distortionary taxes, but recovery to baseline in advanced consolidating regions takes between 10 and 20 years.
    - Labor income taxes: recovery period roughly twice as long as consumption taxes; long-run effect close to zero or slightly positive.
    - Capital income taxes: cause immediate and permanent output losses (at around 0.5 percent to 1 percent, less dramatic than government investment cuts but clearly adverse).
- Mechanisms:
  - Government investment cuts and capital income tax increases progressively worsen the capital stock (public or private), producing prolonged negative growth.
  - Higher income taxes reduce the private saving rate and therefore reduce current account surpluses generated by consolidation.
- Policy lessons:
  - Fiscal consolidation that raises capital income taxes or reduces government investment is very harmful to growth (short and long run); higher labor income taxes are also harmful for a prolonged period.
  - Consolidation aimed at sustainable growth should be structured so income taxes can fall and government investment can rise, while other instruments reduce the deficit.
  - Consolidation through lower unproductive government spending or higher consumption taxes has smaller but non-negligible negative short-run multipliers and close to zero long-run effects.
  - Consolidation through reductions in transfers can be attractive from growth and external imbalances perspectives, but cuts to transfers for liquidity-constrained households have effects almost exactly as large as lower government consumption; best results come from entitlement cuts that affect unconstrained agents as much as possible.

### Conclusions (summary of overarching findings)
- Fiscal consolidation entails a trade-off between short-run pain and long-run gain:
  - Short-run pain arises from negative multipliers of lower spending or higher taxes.
  - Long-run gain arises from lower world real interest rates and lower distortionary taxes associated with lower debt levels.
- Key qualifications:
  - A well-designed, growth-friendly fiscal package reduces long-run pain and short-run costs, with the duration of pain tied closely to the period needed to establish credibility.
  - A poorly designed package (e.g., sharply higher income taxes or cuts to essential government investment) can eliminate or reverse long-run gains.
- On global current accounts:
  - Fiscal consolidation concentrated in regions with large external imbalances contributes to reducing current account deficits (with the exception of Japan, whose current account surplus may improve further).
  - Growth-friendly tax reform tends to increase private savings rates, which helps in rebalancing external positions.

*Italic: Source — Excerpt from provided PDF content.*

### REFERENCES

### _wp10163 - REFERENCES

### References
- Bernanke, B.S., Gertler, M. and Gilchrist, S. (1999), “The Financial Accelerator in a Quantitative Business Cycle Framework”, in: John B. Taylor and Michael Woodford, eds., Handbook of Macroeconomics, Volume 1C. Amsterdam: Elsevier.
- Blanchard, O.J. (1985), “Debt, Deficits, and Finite Horizons”, Journal of Political Economy, 93, 223-247.
- Freedman, C., M. Kumhof, D. Laxton, D. Muir and S. Mursula (2010), “Fiscal Multipliers Galore”, IMF Working Paper (forthcoming).
- Galí, J., J.D. López-Salido and J. Vallés (2007), “Understanding the Effects of Government Spending on Consumption”, Journal of the European Economic Association, 5(1), 227-270.
- Gale, W. and P. Orszag (2004), “Budget Deficits, National Saving, and Interest Rates”, Brookings Papers on Economic Activity, 2, 101-187.
- Girouard, N. and C. André (2005), “Measuring Cyclically-Adjusted Budget Balances for OECD Countries”, OECD Economics Department Working Papers, No. 434, OECD Publishing.
- Ireland, P. (2001), “Sticky-Price Models of the Business Cycle: Specification and Stability”, Journal of Monetary Economics, 47, 3-18.
- Kumhof, M., D. Laxton, D. Muir, and S. Mursula (2009), “The Global Integrated Monetary and Fiscal Model - Theoretical Structure”, IMF Working Papers (forthcoming).
- Laubach, T. (2003), “New Evidence on the Interest Rate Effects of Budget Deficits and Debt”, Finance and Economics Discussion Series 2003-12, Board of Governors of the Federal Reserve System.
- Laxton, D. and P. Pesenti (2003), “Monetary Rules for Small, Open, Emerging Economies”, Journal of Monetary Economics, 50(5), 1109-1152.
- Ligthart, J.E. and Suárez, R.M.M. (2005), “The Productivity of Public Capital: A Meta Analysis”, Working Paper, Tilburg University.

### Figures and What They Present
- Figure 1. Scenarios: Tax Rates
  - Compares "Fiscal Consolidation with Consumption Tax Increase" and "Fiscal Consolidation without Consumption Tax Increase".
  - Presents deviations from baseline for:
    - Consumption Tax Rate (Percentage point dev. from baseline)
    - Labor Income Tax Rate (Percentage point dev. from baseline)
    - Capital Income Tax Rate (Percentage point dev. from baseline)
  - Regions shown include United States, Euro Area excl. Germany, Germany, Japan, Emerging Asia, Remaining Countries.
  - Horizontal axis labels appearing in the figure: 0 5 10 15 20 40 60 (presented in the layout as "05101520 40 60").

- Figure 2. Global Effects
  - Compares "Fiscal Consolidation without Tax Reform (Deviation from Baseline)" and "Fiscal Consolidation with Tax Reform (Deviation from Baseline)".
  - Panels report deviations from baseline for global aggregates:
    - Global Gov’t Surplus (Percentage points of GDP) with horizontal tick labels 0.0 0.1 0.2 0.3 0.4 0.5 0.6
    - Global Gov’t Debt (Percentage points of GDP) with vertical scale -12 -10 -8 -6 -4 -2 0 2
    - Global Long-Run Real Int. Rate (Percentage points) with vertical scale -0.8 -0.6 -0.4 -0.2 0.0 0.2
    - Global Real GDP (Percent) with vertical scale -1 0 1 2 3 4
    - Global Consumption (Percent) with vertical scale -1 0 1 2 3 4 5
    - Global Investment (Percent) with vertical scale -2 0 2 4 6 8 10
  - Horizontal axis tick labels in layout: 0 5 10 15 20 40 60 ("051015204060").

- Figure 3. Short-Run Costs and Credibility (Deviation from Baseline)
  - Compares scenarios: "Credible in Year 3", "Credible in Year 4", "Credible in Year 5".
  - Panels and regions include:
    - United States: Real GDP (Percent), Domestic Absorption (Percent), Trade Balance (Percentage points of GDP), Real Eff. Exch. Rate (Percent)
    - Euro Area excl. Germany: Real GDP, Domestic Absorption, Trade Balance, Real Eff. Exch. Rate
    - Germany: same panel set
    - Japan: same panel set
    - Emerging Asia: same panel set (includes panels with scales -1.0 to 0.5 and -4 to 2)
    - Remaining Countries: similar panels with scales shown (e.g., -0.5 to 0.5, -2 to 1)
  - Horizontal axis in each subpanel uses 0 1 2 3 4 5 ("012345").

- Figure 4. Long-Run Gains: Output and Inflation
  - Compares "Fiscal Consolidation without Tax Reform (Deviation from Baseline)" and "Fiscal Consolidation with Tax Reform (Deviation from Baseline)".
  - Panels include for each region:
    - Real GDP (Percent)
    - CPI Inflation (Percentage points)
    - Policy Interest Rate (Percentage points)
    - Real Pol. Int. Rate (Percentage points)
  - Regions: United States, Euro Area excl. Germany, Germany, Japan, Emerging Asia, Remaining Countries.
  - Horizontal axis tick labels vary between "0510    15    204060" and "0246810" as presented.

- Figure 5. Long-Run Gains: Domestic Absorption
  - Compares the two consolidation scenarios as in Figure 4.
  - Panels report:
    - Consumption (Percent)
    - Investment (Percent)
    - Government Spending (Percent)
  - Regions: United States, Euro Area excl. Germany, Germany, Japan, Emerging Asia, Remaining Countries.
  - Horizontal axis labels displayed as "05101520 40 60" or variants; some panels include numeric strings such as "-0.000000 0.0000000".

- Figure 6. Long-Run Gains: Foreign Trade
  - Compares the two consolidation scenarios.
  - Panels report:
    - Trade Balance (Percentage points of GDP)
    - Exports (Percent)
    - Imports (Percent)
  - Regions: United States, Euro Area excl. Germany, Germany, Japan, Emerging Asia, Remaining Countries.
  - Horizontal axis labels appear as "05101520 40 60".

- Figure 7. External Imbalances: Saving, Investment and Current Account
  - Compares the two consolidation scenarios.
  - Panels report:
    - Government Saving (Percentage points of GDP)
    - Private Saving (Percentage points of GDP)
    - Investment (Percentage points of GDP)
    - Current Account (Percentage points of GDP)
  - Regions: United States, Euro Area excl. Germany, Germany, Japan, Emerging Asia, Remaining Countries.
  - Horizontal axis labels shown as "0510    15    204060".

- Figure 8. External Imbalances: Asset Stocks
  - Compares the two consolidation scenarios.
  - Panels report:
    - Government Assets (Percentage points of GDP)
    - Financial Wealth (Percentage points of GDP)
    - Capital (Percentage points of GDP)
    - Net Foreign Assets (Percentage points of GDP)
  - Regions: United States, Euro Area excl. Germany, Germany, Japan, Emerging Asia, Remaining Countries.
  - Horizontal axis labels shown as "0510    15    204060".

- Figure 9. External Imbalances: Exchange Rates
  - Compares the two consolidation scenarios.
  - Panels report:
    - Nominal USD Exch. Rate (Percent; + = Depreciation)
    - Real USD Exch. Rate (Percent; + = Depreciation)
    - Real Effective Exch. Rate (Percent; + = Depreciation)
    - Additional regional exchange rate panels for Euro Area excl. Germany, Germany, Japan, Emerging Asia, Remaining Countries.
  - Horizontal axis labels appear as "05101520 40 60".

- Figure 10. Different Fiscal Instruments: Spending
  - Compares fiscal consolidations financed by:
    - Cuts in Government Investment (Deviation from Baseline)
    - Cuts in Government Consumption (Deviation from Baseline)
    - Cuts in Targeted Transfers (Deviation from Baseline)
    - Cuts in General Transfers (Deviation from Baseline)
  - Panels include:
    - Real GDP (Percent)
    - Current Account (Percentage points of GDP)
  - Regions: United States, Euro Area excl. Germany, Germany, Japan, Emerging Asia, Remaining Countries.
  - Horizontal axis labels shown as "051015204060".

- Figure 11. Different Fiscal Instruments: Taxes
  - Compares fiscal consolidations financed by:
    - Increase in Labor Income Taxes (Deviation from Baseline)
    - Increase in Capital Income Taxes (Deviation from Baseline)
    - Increase in Consumption Taxes (Deviation from Baseline)
    - General Transfers (Deviation from Baseline)
  - Panels include:
    - Real GDP (Percent)
    - Current Account (Percentage points of GDP)
  - Regions: United States, Euro Area excl. Germany, Germany, Japan, Emerging Asia, Remaining Countries.
  - Horizontal axis labels shown as "051015204060".

*Source: _wp10163 - REFERENCES (PDF figures and reference list).*

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