## _wp1238 — 1. Calibration

## Source details

**Canonical URL:** [_wp1238 — 1. Calibration](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1238.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1238.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1238.pdf.json)

---

### I. Introduction — context and motivation
- Great Recession legacy: sharp deterioration of public finances in most advanced economies.
- U.S. federal debt held by the public:
  - surged from 36 percent of GDP in 2007 to around 70 percent in 2011.
  - CBO foresees the debt held by the public to exceed 150 percent of GDP by 2030.
- Estimated federal “fiscal gap”:
  - closing the gap would require a permanent fiscal adjustment of about 15 percent of GDP.
- Shortcomings of standard debt-accounting projections:
  - relative prices and economic activity are unaffected by different fiscal policies in debt-accounting exercises;
  - such exercises cannot be used for welfare analysis.
- Key quantitative preview:
  - failing to address federal fiscal imbalances for a prolonged period results in a permanent output loss of about 17 percent and a welfare loss of almost 7 percent of lifetime consumption.
  - long-run welfare gains from stabilizing federal debt at a low level more than compensate welfare losses associated with the consolidation period.
  - crowding-out effects of public debt are an order of magnitude bigger than policy-mix effects.

### Model framework and key mechanisms
- Structure and agents:
  - rational expectations dynamic stochastic general equilibrium model with heterogeneous agents, endogenous occupational choice and labor supply.
  - economy: closed, continuum of infinitely lived agents normalized to one; discrete time with each period = 1 year.
  - ex-ante identical agents face idiosyncratic entrepreneurial ability and labor productivity shocks and choose occupation each period.
- Uncertainty and markets:
  - no aggregate uncertainty; idiosyncratic shocks (θ, z) follow AR(1) Markov processes.
  - markets incomplete → precautionary savings accumulate.
- Production and finance:
  - production combines capital, labor (efficiency units), and entrepreneurial ability with deterministic labor-augmenting productivity trend (γ or σ in text).
  - financial intermediation: competitive intermediaries take deposits (a), lend to entrepreneurs and buy one-period risk-free government bonds (B); external finance premium ξ applies when entrepreneurs borrow beyond internal funds; collateral tightness parameter θ limits borrowing.
- Government:
  - no lump-sum taxation; distortionary taxes on labor (τ_p), consumption (τ_c), and income (τ_y); issues one-period non-contingent bonds; lump-sum transfers T model entitlements; exogenous public consumption g (wasteful).
- Equilibrium conditions:
  - capital and labor market clearing, occupational choice, government budget constraint, and distributions induced by policy functions and shocks.

### Preferences, production, and calibration targets
- Preferences and baseline:
  - discount factor β = 0.91 → equilibrium risk-free rate r = 3 percent in initial steady state.
  - relative risk aversion ϕ = 1.5.
  - labor supply curvature χ = 3 → Frisch elasticity = 0.5.
  - leisure scale parameter normalized so average labor input `l̄ = 1` in initial steady state.
- Production and entrepreneurship:
  - entrepreneurs’ share parameter ψ (notation ϕ in text) = 0.15.
  - capital income share α = 0.36.
  - annual depreciation rate δ = 6 percent.
  - gross growth rate of labor-augmenting technological progress σ = 1.02.
  - external finance premium ξ = 1.7 percent (average Baa – TR10 spread, 2005–2006).
  - collateral tightness θ = 1.5 → average liabilities/assets for entrepreneurs = 0.47 (average 1990–2007, Flow of Funds).
- Idiosyncratic risk processes:
  - persistence ρ_θ = ρ_z = 0.9.
  - standard deviation σ_θ = 0.2; σ_z = 0.4.
  - approximations: labor productivity → 5-state Markov; entrepreneurial ability → 3-state Markov (Tauchen (1986)).
- Calibration vintage and steady state:
  - data vintage for initial steady state: 2007 (CBO and OMB).
  - stock of debt B/GDP (initial steady state) = 36 percent.

### Fiscal calibration (2007 shares and rates)
- Non-interest federal expenditures (2007, percent of GDP):
  - Transfers T/GDP = 12.0%
    - Medicaid = 1.9%
    - Medicare = 2.7%
    - Social Security = 4.2%
    - Veterans = 0.5%
    - Non-Mandatory Income Security = 0.4%
    - General retirement and disability = 0.1%
    - Federal employee retirement and disability = 0.7%
    - Food and nutrition assistance = 0.4%
    - Unemployment compensation = 0.2%
    - Supplemental Security Income = 0.2%
    - Family and Other Support Assistance = 0.2%
    - Earned Income Tax Credit = 0.3%
    - Child Tax Credit = 0.1%
    - Recovery Rebate Tax Credit = 0.1%
  - Other noninterest spending g = 5.5%
  - National Defense = 4.0%
  - International Affairs, Administration of Justice, General Government = 0.6%
  - Energy, Transportation, Science, Technology = 1.3%
  - Adjustment for not including Seigniorage and Tariffs = -0.4%
- Tax rates calibrated to match 2007 federal revenues:
  - Consumption tax τ_c = 0.7% → excise tax revenue 0.47% of GDP.
  - Payroll tax τ_p = 15.8% → social security contributions revenue 6.26% of GDP.
  - Income tax τ_y = 16.3% → federal income tax revenue 11.9% of GDP.
- Other fiscal facts:
  - transfers (T/GDP) = 12% of GDP in 2007; mandatory spending on Medicaid, Medicare and Social Security reported as 8.8 percent of GDP in text earlier.
  - other noninterest spending g = 5.9 percent of GDP in 2007 in one passage; elsewhere calibrated to 5.5 percent with -0.4 percent adjustment noted.

### Fiscal scenarios simulated (design and common assumptions)
- Common fiscal legacy from the Great Recession across scenarios:
  1. Cost of transfers increased by 1.2 percent of GDP (relative to pre-crisis).
  2. Other noninterest spending jumped by about 3 percent of GDP.
  3. Debt held by the public increased from 36 to 69 percent of GDP (almost doubled).
- Benchmark (delay) scenario:
  - current fiscal policies maintained for about twenty years.
  - model fed with spending and revenue projections from CBO’s Alternative Fiscal scenario (CBO 2011) until about 2030; around 2030 government increases all taxes to stabilize debt at prevailing level.
  - delay scenario: government transfers increase by 4.2% of GDP and other noninterest spending decreases by 3% of GDP during the same period; after 2030 transfers stabilize and all taxes adjusted to stabilize debt.
- Adjustment scenarios (immediate reform):
  - three alternative scenarios aim to reduce federal debt to pre-crisis level (~36% of GDP):
    - Passive adjust scenario: same spending structure as delay but tax reform introduced earlier; primary spending-to-GDP converges to about 23% of GDP in medium-term; tax rates increased once immediately in 2011, then decreased permanently around twenty years later.
    - Active adjust scenarios (two variants based on Bowles-Simpson):
      - Spending reforms: freeze discretionary and security spending until 2020; reduce health/pensions/other social programs with Commission-estimated savings by 2020: health care cost -0.3% of GDP, pensions -0.1% of GDP, other social programs -0.2% of GDP, other noninterest spending -1.3% of GDP; savings permanent from 2020.
      - Revenue reforms: eliminate tax expenditures, simplify code, broaden base, reduce statutory rates, use chained CPI, introduce carbon tax, increase maximum wage subject to payroll tax; Commission expects ~80 percent of increased revenue to fall under income tax and deductions.
      - Active (1): all taxes adjusted proportionally.
      - Active (2): tax reform falls entirely on the personal income tax.
      - As in passive adjust, tax rates increased once in 2011, then decreased permanently ~20 years later to stabilize debt at 36% of GDP.
- Iterative calibration:
  - match CBO spending shares via iterative guesses for spending paths in real terms, compute equilibrium transition, compare spending/GDP with CBO projections, update until reasonable match.

### Long-run (steady-state) comparison — main findings and key statistics (around 2035)
- Long-run federal debt in hands of the public:
  - Delay scenario: 200 percent of GDP.
  - Passive adjust scenario: 36 percent of GDP.
- Equilibrium real interest rates:
  - Delay scenario real interest rate: 8.85 percent.
  - Delay scenario rate is 468 basis points (bps) higher than in the passive adjust scenario.
  - Implied elasticity: 29 bps increase in the equilibrium interest rate for every 10 percentage point increase in the debt-to-GDP ratio.
  - Differences across adjust scenarios are on the order of 10 bps.
- Capital, labor, and distributional effects (delay vs adjusts):
  - Share of entrepreneurs in delay scenario ≈ 12.2% vs 26.1% in passive adjust (difference reported as 13.9 percentage points).
  - Aggregate capital stock in delay scenario = 0.150 vs passive 0.181 (delay ≈ -17.3% relative to passive).
  - Real wage in delay scenario = 0.516 vs passive 0.640 (delay ≈ -19.4%).
  - Total hours worked similar across steady states; aggregate labor L̄: delay = 0.104 vs passive = 0.100 (delay ≈ 4.1% higher).
- Output and consumption:
  - GDP level: delay Y = 0.099 vs passive Y = 0.117 (delay ≈ -15.7%).
  - Aggregate consumption: delay C = 0.082 vs passive C = 0.085 (delay ≈ -3.5%).
  - Reported differences between delay and adjust scenarios:
    - Delay vs active (1) adjust: 17.7 percent lower output.
    - Delay vs active (2) adjust: 17.1 percent lower output.
    - Delay vs passive adjust: 15.7 percent lower output.
- Welfare:
  - Consumption-equivalent steady-state welfare difference: average steady state welfare difference equivalent to permanently increasing consumption to each agent in the delay economy by 6 percent while leaving leisure unchanged (i.e., consolidation yields about 6 percent welfare gain in this metric).
  - Authors report long-run welfare benefit from stabilization at pre-crisis debt more than 7 percent of lifetime consumption for the active (1) adjust scenario relative to delay in places.
  - Table entries: welfare (consumption equivalent) comparisons and percent differences across scenarios (e.g., delay shows -6.0% vs adjust scenarios; passive adjust shows 7.1%).
  - Welfare by wealth deciles: agents up to the 7th decile would be better off under fiscal consolidation.

### Transitional dynamics (2011–~2035) — paths and outcomes
- Deterministic productivity growth = 2 percent per year.
- Delay scenario transitional facts:
  - Average annual GDP growth 2011–2035 = 1.04 percent.
  - Initial expansionary effect until ~2020–2025 due to higher disposable income and savings, especially for lower-income households; capital and entrepreneurship initially rise, then reverse as lower marginal returns and rising public interest bill crowd out private investment.
  - Consumption per capita grows steadily but adjusts down permanently at the time of consolidation.
- Adjust scenario transitional facts:
  - Average annual GDP growth 2011–2035 = 1.8 percent.
  - Immediate increase in personal income tax contracts private capital and raises pre-tax equilibrium interest rate initially; some agents switch from entrepreneurship to working.
  - After initial phase and until ~2025, capital, per-capita output and consumption grow close to the 2 percent productivity trend; as debt falls (≈48% by 2023 and 36% by 2035 in endogenous path), equilibrium interest rate falls and private investment and entrepreneurship rise.
  - Consumption: average consumption grows below trend early until ~2020–2025, then grows above trend and stabilizes after 2035 at a higher level than under delay.
- Debt paths and comparison:
  - Endogenous adjust path implies debt-to-GDP = 48 percent by 2023 and 36 percent by 2035 (model endogenous path) vs Commission’s proposal reported as 60 percent and 40 percent for same dates.

### Overall welfare cost of delaying fiscal consolidation
- Long-run welfare:
  - Average welfare in the adjust scenario is higher than in the delay scenario by 6.7 percent of lifetime consumption (long-run).
- Infinite-horizon welfare starting in 2011:
  - Under the delay scenario, consumption would have to be raised by 0.8 percent for all agents in all periods (leisure unchanged) to attain the same average utility as under the adjust scenario (baseline calibration).
- Discounting sensitivity:
  - Calibrated subjective discount factor β = 0.91 implies a yearly discount rate ≈ 9.9 percent in the model.
  - Using a discount rate of 3 percent yields a consumption-equivalent welfare gain of 5.9 percent (instead of 0.8 percent).
- Distributional notes:
  - The wealthiest decile is worse off under the adjust scenario in the long-run comparison; in transitional welfare comparison the first four deciles also face welfare losses in the adjust scenario.

### Policy-design vs. timing — implications emphasized
- Reducing promptly the level of public debt is substantially more important for activity and welfare than differences in the size of government or the detailed design of tax reform.
- Crowding-out effects of public debt dominate policy-mix effects by an order of magnitude.
- Policy mixes that reduce government size and distribute higher tax pressure across taxes yield higher long-term output, consumption, and welfare; however, marginal gains from policy-mix differences are small relative to gains from lowering the debt ratio.
- Specific quantitative comparisons of policy mixes:
  - Long-run primary spending-to-GDP ratio is about 2 percent lower under active adjust scenarios than passive adjust.
  - Reported long-run fiscal outcomes for consumption, labor, and income revenue shares and tax rates are provided in the steady-state comparison table (e.g., consumption tax τ_c rises to 3.2% in passive, 2.5% in active (1), 0.8% in active (2); delay τ_c = 6.5%).

### Scope, limitations, and interpretive caveats
- Scope:
  - Focus on medium-term to long-term costs and benefits of fiscal consolidation for the U.S.; leaves aside short-run nominal and liquidity concerns (e.g., near-zero nominal rates, output below potential) and optimal near-term instrument mix.
- Model limitations:
  - Closed economy assumption may be questionable given U.S. reliance on foreign financing.
  - Abstracts from default risk, nominal issues, and real/nominal rigidities typical of new Keynesian frameworks; these omissions affect short-term cyclical analysis more than long-term issues.
  - Agents face idiosyncratic uncertainty but have perfect foresight about future paths of fiscal instruments and prices; uncertainty about timing and composition of adjustment is excluded.
- Calibration note reiterated:
  - β = 0.91 (such that r = 3% in the initial steady state).

*Source: Excerpt from _wp1238 — 1. Calibration (IMF working paper content provided).*

### 1. Calibration..........................................................................................................

### _wp1238 - 1. Calibration..........................................................................................................

### I. Introduction — context and motivation
- Great Recession legacy: sharp deterioration of public finances in most advanced economies.
- U.S. federal debt held by the public:
  - surged from 36 percent of GDP in 2007 to around 70 percent in 2011.
  - CBO foresees the debt held by the public to exceed 150 percent of GDP by 2030.
- Estimated federal “fiscal gap”:
  - closing the gap would require a permanent fiscal adjustment of about 15 percent of GDP.
- Shortcomings of standard debt-accounting projections:
  - relative prices and economic activity are unaffected by different fiscal policies in debt-accounting exercises;
  - such exercises cannot be used for welfare analysis.
- Key quantitative finding previewed:
  - failing to address federal fiscal imbalances for a prolonged period results in a permanent output loss of about 17 percent and a welfare loss of almost 7 percent of lifetime consumption.
  - long-run welfare gains from stabilizing federal debt at a low level more than compensate welfare losses associated with the consolidation period.
  - crowding-out effects of public debt are an order of magnitude bigger than policy-mix effects.

### Model framework and assumptions
- Modeling approach:
  - rational expectations dynamic stochastic general equilibrium model with heterogeneous agents, endogenous occupational choice and labor supply.
  - ex-ante identical agents face idiosyncratic entrepreneurial ability and labor productivity shocks and choose occupation.
  - agents can become entrepreneurs (hire workers) or workers (choose fraction of time to work).
- Government finances in the model:
  - government does not have access to lump sum taxation;
  - raises distortionary taxes on labor, consumption, and income;
  - issues one-period non-contingent bonds to finance lump sum transfers to all agents, other noninterest spending, and service its debt.
- Rationale for heterogeneity:
  - heterogeneous agents are crucial because entitlement spending drives debt sustainability concerns and transfers insure households from very low consumption; this allows a meaningful tradeoff between distortionary taxation and government transfers.
- Computational and informational limitations:
  - agents face individual uncertainty but have perfect foresight about future paths of fiscal instruments and prices;
  - uncertainty about timing and composition of adjustment is excluded to limit computational cost (though acknowledged as relevant and explored elsewhere).

### Fiscal scenarios simulated
- Benchmark (delay) scenario:
  - maintains current fiscal policies for about twenty years;
  - model is fed with spending (noninterest mandatory and discretionary) and revenue projections from CBO’s Alternative Fiscal scenario (CBO 2011) until about 2030;
  - around 2030 assume government increases all taxes to stabilize the debt at its prevailing level.
- Adjustment scenarios (immediate reform):
  - three alternative scenarios assume immediate adoption of fiscal reform aimed at gradually reducing federal debt to its pre-crisis level.
  - one adjustment scenario assumes same size of government and tax structure as benchmark to isolate effect of delaying adjustment and stabilizing debt at a high level.
  - two alternative adjustment scenarios incorporate spending and revenue measures proposed by the bipartisan December 2010 Bowles-Simpson Commission.

### Main results and comparative insights (summary statements from paper)
- Macroeconomic and welfare consequences:
  - prolonged failure to address fiscal imbalances leads to significant crowding-out of private investment and drag on growth.
  - permanent output loss of about 17 percent and welfare loss of almost 7 percent of lifetime consumption in the delay scenario.
  - long-run welfare benefits of stabilizing federal debt at a low level outweigh transitional consolidation costs.
- Policy-design vs. timing:
  - reducing promptly the level of public debt is substantially more important for activity and welfare than differences in the size of government or design of the tax reform.
  - crowding-out effects of public debt dominate policy-mix effects by an order of magnitude.
- Comparison with representative-agent models:
  - representative-agent models cannot capture redistributive and insurance effects of fiscal policy and therefore have a positive bias toward reforms that lower transfers, reduce the debt, and lower tax rates.
  - in representative-agent deterministic steady states the real interest rate is independent of the debt level; in this heterogeneous-agent model the equilibrium real interest rate is endogenously affected by government debt, consistent with empirical literature.
- Reference contrasts in CBO projections:
  - debt held by the public in 2035 is projected to be 84 percent of GDP in CBO’s Extended-Baseline scenario but 187 percent in its Alternative Fiscal scenario (CBO 2011), while GDP growth and the real interest rate projected for the medium-term are the same in both scenarios (illustrating limitations of pure accounting projections).

### Scope, limitations, and relation to the literature
- Scope:
  - focuses on medium-term to long-term costs and benefits of fiscal consolidation for the U.S.
  - explicitly leaves aside short-run questions that require accounting for current context of growth below potential and nominal interest rates close to zero (e.g., effects of back-loading consolidation while announcing a credible medium-run adjustment; optimal near-term fiscal instrument mix).
- Relation to prior work:
  - extends literature using general equilibrium models to study fiscal consolidation by incorporating heterogeneous agents and occupational choice, allowing welfare analysis and endogenous interest-rate responses to debt.
  - differs from Li (2002), Meh (2005), Kitao (2008) by focusing on debt dynamics and fiscal consolidation rather than balanced-budget every period; augments model to include growth and computes transitional dynamics and welfare costs of transition.

*Source: _wp1238 - 1. Calibration (pages 3–6 of the provided content).*

### section III discusses its calibration. In section IV we detail the fiscal policy scenarios that we

### _wp1238 - section III discusses its calibration. In section IV we detail the fiscal policy scenarios that we

### Model structure and key mechanisms
- Economy: closed, continuum of infinitely lived agents normalized to one; discrete time with each period = 1 year.
- Occupational choice: agents decide each period whether to be workers or entrepreneurs (references: Kitao (2008), Cagetti and De Nardi (2009)).
- Uncertainty: no aggregate uncertainty; idiosyncratic shocks to labor productivity (ߠ) and entrepreneurial ability (ݖ) that follow AR(1) Markov processes with transition matrices ߁.
- Markets: incomplete (no insurance for idiosyncratic shocks) → precautionary savings accumulate.
- Production: combines capital, labor (efficiency units), and entrepreneurial ability; deterministic trend in labor-augmenting productivity (߱).
- Financial intermediation: competitive intermediaries take deposits (ܽ), lend to entrepreneurs and buy one-period risk-free government bonds (ܤ); external finance premium ߰ applies when entrepreneurs borrow beyond internal funds; collateral constraint limits borrowing (tightness parameter ߣ).
- Government: no lump-sum taxation access; revenues from a consumption tax (߬௖), payroll tax (߬௛), income tax (߬௬), and issuing one-period risk-free bonds (ܤ); lump-sum transfers (ݎݐ) model entitlements; exogenous public consumption g (wasteful in model).
- Equilibrium conditions: capital and labor market clearing (equations (11) and (12)), occupational choice (equation (13)), government budget constraint (equation (14)), distributions induced by policy functions and shocks.

### Preferences and household decisions (formal)
- Lifetime utility: E[Σβ^t u(c_t,h_t)], where ߚ is the time discount factor.
- Momentary utility functional form: Greenwood, Hercowitz, and Huffman (1988) specification with Frisch elasticity = 1/(1 ߶) and intertemporal elasticity of substitution = 1/ߪ; leisure scale parameter ߩ.
- Labor augmenting technology enters utility via ω_t = γ^t ω, γ > 1, to ensure balanced growth.
- Individual state: assets ܽ, labor productivity ߠ, entrepreneurial ability ݖ.
- Consumer problem (recursive) yields optimal labor supply function for workers (equation (6)) and consumption-savings policy rule ܽʹ(ݖ,ߠ,ܽ).

### Entrepreneurs and production details
- Production technology: y_n,k,z = z(߱) * [k^α * n^(1-α)]^(1-ψ) (? expressed in equation (7) form); span of control parameter 1-ψ determines share to variable factors.
- Profit maximization subject to collateral constraint and zero-profit pricing for financial intermediation: rental price of capital = δ + r; entrepreneurs pay external finance premium ߰ when borrowing > internal funds.
- Capital depreciates at rate ߜ.
- Collateral constraint: entrepreneurs can divert fraction 1/ߣ (ߣ ≥ 1) of borrowed funds; lenders limit lending so borrowers do not renege.

### Aggregates, timing, and stationarization
- Aggregates: aggregate assets ܣ, consumption ܥ, transfers ݎܶ, labor supply ܮ^S, labor demand ܮ^D, capital demand ܭ^D, capital supply ܭ^S (equations (9), (10)).
- Timing: shocks realized → occupational choice → workers choose hours → entrepreneurs seek credit, rent capital, hire labor → production → payments, taxes, savings decisions → financial intermediary buys government bonds and supplies loans next period.
- Stationary transformation: variables scaled by gross growth ߛ to obtain stationary counterparts (e.g., ĉ = c/ߛ^t, ŵ = w/ߛ^t, etc.). Balanced growth path: per capita variables grow at constant gross rate ߛ; cross-sectional distributions constant.

### Calibration (section III) — parameters and targets
- Total parameters to assign: 20.
- Parameters set from literature (7): ߶, ψ, ߛ, α, ߜ, ߰, ߪ.
- Parameters calibrated to match U.S. data (13): ߩ, ߣ, ߩ_... (full list in text), including fiscal variables ߬௖, ܤ, ݎݐ, g, ߬௛, ߬௬.
- Data vintage for initial steady state: 2007 (CBO and OMB).

Preferences
- Discount factor ߚ = 0.91 → equilibrium risk-free rate r = 3 percent in initial steady state.
- Relative risk aversion ߪ = 1.5.
- Labor supply curvature ߶ = 3 → Frisch elasticity = 0.5.
- Labor disutility scale ߩ normalized so average labor input ݄ = 1 in initial steady state.

Entrepreneurship and production
- Share of entrepreneurs’ output ψ (notation in text uses ݒ) = 0.15.
- Capital income share α = 0.36.
- Annual depreciation rate ߜ = 6 percent.
- Gross growth rate of labor-augmenting technological progress ߛ = 1.02.
- External finance premium ߰ = 1.7 percent (average Baa – TR10 spread, 2005–2006).
- Collateral tightness ߣ = 1.5 → average ratio liabilities/assets for entrepreneurs = 0.47 (average 1990–2007, Flow of Funds).

Idiosyncratic risk
- Persistence parameters for labor and entrepreneurial shocks: ρ_θ = ρ_z = 0.9.
- Standard deviation of labor productivity shock σ_θ = 0.2.
- Standard deviation of entrepreneurial ability shock σ_z = 0.4.
- Approximation of processes: labor productivity → 5-state Markov; entrepreneurial ability → 3-state Markov (Tauchen (1986) method).

Fiscal policy and initial fiscal ratios (2007)
- Transfers (ݎݐ) = 12 percent of GDP in 2007; mandatory spending on Medicaid, Medicare and Social Security = 8.8 percent of GDP.
- Other noninterest (wasteful) spending g = 5.9 percent of GDP in 2007; reduced by 0.4 percent of GDP in every period to account for tariffs and seigniorage omission.
- Tax rates calibrated to match 2007 federal revenues:
  - Consumption tax ߬௖ = 0.7 percent → matches excise tax revenue 0.47 percent of GDP.
  - Payroll tax ߬௛ = 15.8 percent → matches social security contributions revenue 6.26 percent of GDP.
  - Income tax ߬௬ = 16.3 percent → matches federal income tax revenue 11.9 percent of GDP.
- Stock of debt ܤ (initial steady state) = 36 percent of GDP (federal debt held by public in 2007).

### Fiscal policy experiments (section IV) — design and common assumptions
- Purpose: (1) simulate implications of postponing fiscal consolidation for an extended period; (2) compare to immediate gradual fiscal consolidation to stabilize debt-to-GDP at pre-crisis level in medium-term; analyze macro aggregates and welfare effects at new steady state and along transition.
- Common fiscal legacy from the Great Recession across scenarios:
  1. Cost of transfers increased by 1.2 percent of GDP (relative to pre-crisis).
  2. Other noninterest spending jumped by about 3 percent of GDP.
  3. Debt held by the public increased from 36 to 69 percent of GDP (almost doubled).
- Scenarios differ only in projected path of fiscal policy.

Delay scenario (A)
- Assumption: fiscal policy remains as in current legislation for twenty years.
- Model inputs: paths for entitlement and other noninterest outlays as CBO projects (CBO Alternative Fiscal Scenario referenced).
- CBO projection characteristics noted: ever-increasing transfers due to aging population and health care cost growth → escalating debt-to-GDP ratio.
- Text notes that CBO projects increases: Medicare and Medicaid and Social Security spending would increase by 3.6 percent and 1.2 percent of GDP respectively between 2011 and [text truncated here], and other non-interest spending would decrease by 3.6 percent of GDP (sentence in source incomplete).

*Source: IMF working paper content (sections II–IV excerpt).*

### 2030. Based on these projections and our reclassification of spending categories, the delay scenario foresees

### _wp1238 - 2030. Based on these projections and our reclassification of spending categories, the delay scenario foresees

### Scenario design and assumptions
- Delay scenario:
  - Government transfers increase by 4.2% of GDP and other noninterest spending decreases by 3% of GDP during the same period.
  - After 2030 spending in transfers stabilizes such that primary spending to GDP becomes stationary and all taxes are adjusted as needed to stabilize the debt.
  - Tax rates remain fixed until the adjustment period; primary balance to GDP series broadly in line with CBO’s projections.
- Iterative calibration to match CBO spending shares:
  - i) guess path for spending in real terms and compute equilibrium transition of model; ii) compare spending as share of GDP with CBO projections and update guess; iii) repeat until reasonable match.
- Adjust scenarios (aim to stabilize public debt held by the public at pre-crisis level, about 36 percent of GDP):
  - Passive adjust scenario:
    - Same spending paths as delay scenario; tax reform introduced earlier.
    - Primary spending-to-GDP ratio converges to about 23 percent of GDP in the medium-term.
    - Tax rates increased once immediately in 2011, then decreased permanently around twenty years later to stabilize debt at pre-crisis level.
    - Difference from delay scenario: long-run debt level and level of individual taxes needed to finance interest payments.
  - Active adjust scenarios (two variants, based on Bowles-Simpson proposals):
    - Spending side: freeze discretionary and security spending until 2020; reduce social spending via Medicare and Medicaid reforms.
    - Commission estimated savings by 2020 relative to its baseline: lower health care cost by 0.3 percent of GDP, reduce pensions cost by 0.1 percent of GDP, diminish other social programs by 0.2 percent of GDP, and reduce other noninterest spending by 1.3 percent of GDP.
    - Constructed spending series by applying these projected savings to delay scenario series; savings become permanent starting in 2020.
    - Long-run primary spending-to-GDP ratio is about 2 percent lower than under the passive adjust scenario.
    - Revenue side (Commission proposals): eliminate tax expenditures, simplify the code, broaden the base, reduce statutory rates, use chained CPI, introduce a carbon tax, and increase maximum wage subject to payroll tax.
    - Commission expects around 80 percent of increased revenue to fall under income tax and deductions.
    - Active (1) adjust scenario: all taxes adjusted proportionally.
    - Active (2) adjust scenario: tax reform falls entirely on the personal income tax.
    - As in passive adjust, relevant tax rates increased once immediately in 2011, then decreased permanently around twenty years later to stabilize debt-to-GDP at pre-crisis level.

### Results — Long-run effects (steady states around 2035)
- Purpose:
  - Compare delay vs. passive adjust to isolate costs of postponing consolidation (stabilizing debt at a higher level).
  - Compare active adjust variants to assess effects of consolidation composition.
- Long-run federal debt in hands of the public:
  - Delay scenario: 200 percent of GDP.
  - Passive adjust scenario: 36 percent of GDP.
- Equilibrium real interest rates:
  - Delay scenario real interest rate: 8.85 percent.
  - Delay scenario rate is 468 basis points (bps) higher than in the passive adjust scenario.
  - Implied elasticity: 29 bps increase in the equilibrium interest rate for every 10 percentage point increase in the debt-to-GDP ratio.
  - Differences in interest rates across adjust scenarios are in the order of 10 bps (minor relative to ~470 bps difference with delay scenario).
- Capital, labor, and distributional effects:
  - Share of entrepreneurs in delay scenario is roughly one half the share under passive adjust scenario.
  - Aggregate capital stock in delay scenario is about 17 percent lower.
  - Real wage in delay scenario is more than 19 percent lower.
  - Total hours worked similar across steady states (lower individual hours offset higher share of workers).
  - Wealth distribution significantly more concentrated under the delay scenario (Figure 4 referenced).
- Output and consumption:
  - GDP level is about 16 percent lower in the delay than in the passive adjust scenario.
  - Aggregate consumption is 3.5 percent lower under the delay scenario.
- Welfare:
  - Consumption-equivalent welfare metric: average steady state welfare difference equivalent to permanently increasing consumption to each agent in the delay scenario economy by 6 percent while leaving leisure unchanged.
  - Interpreted as permanent welfare gain from stabilizing public debt at its pre-crisis level.
  - Welfare comparison by wealth deciles indicates agents up to the 7th decile would be better off under fiscal consolidation.
- Effects of consolidation composition (active vs passive adjust scenarios):
  - All three adjust scenarios have federal debt in hands of the public at 36 percent of GDP, but differ marginally in interest rates due mainly to tax-rate differences.
  - Primary spending in active adjust scenarios is lower than in passive adjust, requiring less tax pressure; long-run primary spending-to-GDP ratio about 2 percent lower than passive adjust.
  - Active (2) adjust scenario tilts tax reform towards income tax, raising the equilibrium real interest rate relative to active (1) and passive adjust scenarios despite similar revenue-to-GDP.
  - Distributing higher tax pressure across all taxes (including consumption taxes) — as in active (1) — lowers distortions and yields higher capital stock and more growth-friendly consolidation.
  - Difference in output level between delay and adjust scenarios:
    - Delay vs active (1) adjust: 17.7 percent.
    - Delay vs active (2) adjust: 17.1 percent.
    - Delay vs passive adjust: 15.7 percent.
  - Per-capita consumption difference with the delay scenario noted as 3.5 (percent) in the context of earlier consumption statistics.

*Source: _wp1238 - 2030. Based on these projections and our reclassification of spending categories, the delay scenario foresees*

### 5.8 and 5.4 percent respectively for the passive, active (1) and active (2) adjustment

### _wp1238 - 5.8 and 5.4 percent respectively for the passive, active (1) and active (2) adjustment

### Steady-state comparison — main findings
- Policy mixes that reduce the size of government and distribute higher tax pressure across taxes yield higher long-term output, consumption, and welfare.
- The marginal gain from differences in the policy mix of the consolidation package is small relative to the gain from reducing the debt ratio.
- Most of the long-run gain from fiscal consolidation is due to stabilizing the debt-to-GDP ratio at its pre-crisis level.
- Specific numeric comparisons reported:
  - 5.8 and 5.4 percent respectively for the passive, active (1) and active (2) adjustment scenarios.
  - The policy mix under the active (1) adjust scenario ranks best in terms of welfare, with the welfare differential with respect to the delay scenario being more than 7 percent of lifetime consumption.

### Transitional dynamics (2011 to ~2035)
- Setup and agent behavior:
  - Fiscal and macro aggregates are traced from 2011 until the economy reaches the new steady state (around 2035).
  - At the start, government announces paths for transfers, other noninterest spending, and tax rates; agents re-optimize given these announced paths.
  - After policy variables become constant, the economy converges to the scenario-specific steady state where aggregate variables grow at the deterministic productivity growth rate.
- Deterministic productivity growth:
  - Aggregate productivity grows deterministically at 2 percent per year.

### Delay scenario — transitional and steady outcomes
- Fiscal path:
  - Government transfers to GDP increase at a constant rate from 2015 onwards, financed by ever increasing public debt; revenues to GDP remain broadly constant until the fiscal adjustment.
- Growth and dynamics:
  - Average annual GDP growth rate in 2011-2035 is 1.04 percent under the delay scenario.
  - Initial expansionary effect until around 2020-2025 driven by higher disposable income and savings, especially for lower-income households.
  - Higher savings reduce equilibrium interest rate, encourage entrepreneurship, raise capital stock, increase real wage and individual hours worked; output per capita grows above productivity trend for about half of the transition.
  - Eventually lower marginal returns reduce incentives to save and supply labor; capital accumulation and output per capita reverse and decline; private asset unwinding raises equilibrium interest rate, lowers profits, and accelerates public debt growth via higher government interest bill.
- Consumption:
  - Consumption per capita grows steadily along the transition and adjusts significantly only when the fiscal consolidation kicks in; at consolidation, per capita consumption adjusts permanently to a much lower level.

### Adjust scenario — transitional and steady outcomes
- Fiscal path and timing:
  - Transfers to GDP increase more slowly; other noninterest spending to GDP contracts faster; primary spending to GDP stabilizes at a permanently lower level.
  - Personal income tax increases immediately in 2011 and is then permanently decreased when consolidation is completed, ensuring the debt-to-GDP ratio stabilizes at its pre-crisis level.
- Growth and dynamics:
  - Average annual output growth in 2011-2035 is 1.8 percent under the adjust scenario.
  - Immediate increase in personal income tax contracts private capital and raises the (pre-tax) equilibrium interest rate initially; entrepreneurs’ profits are reduced and some agents switch to working.
  - Real wages see opposing forces (higher gross wages to offset taxes vs. wage depression from increased labor supply); slight contraction in real wages at the beginning, total hours worked remain roughly constant.
  - After tax reform and until around 2025 capital, per-capita output and consumption grow almost at the 2 percent deterministic productivity rate; when debt reaches about 40 percent of GDP, demand for public debt financing recedes, equilibrium interest rate falls, private investment and entrepreneurship rise — capital and output grow above trend for some time.
  - After the subsequent permanent income tax reduction, equilibrium interest rate drops further and capital adjusts.
- Consumption:
  - Average consumption grows below trend during the first phase until around 2020-2025; once debt is low enough, per capita consumption grows above trend and stabilizes after 2035 at a higher level than under the delay scenario.
- Debt path (comparison to a Commission plan cited in the source):
  - Endogenous path reported implies debt-to-GDP would be 48 percent by 2023 and 36 percent by 2035, as opposed to 60 percent and 40 percent, respectively, under the Commission’s proposal.

### Overall welfare cost of delaying fiscal consolidation
- Long-run welfare:
  - Average welfare in the adjust scenario is higher than in the delay scenario by 6.7 percent of lifetime consumption (long-run).
- Infinite-horizon welfare comparison starting in 2011:
  - Under the delay scenario, consumption would have to be raised by 0.8 percent for all agents in all periods (leisure unchanged) to attain the same average utility as under the adjust scenario.
  - Wealth distribution effects: the wealthiest decile is worse off under the adjust scenario in the long-run comparison; in the transitional welfare comparison the first four deciles also face welfare losses in the adjust scenario.
- Sensitivity to discount rate:
  - The calibrated subjective discount factor implies a yearly discount rate of about 9.9 percent in the model.
  - Using a discount rate of 3 percent yields a consumption-equivalent welfare gain of 5.9 percent (instead of 0.8 percent).
- Interpretation caveats that make the reported 0.8 percent a lower bound:
  - Model assumes no default — ignores potential effect of higher public debt on the risk premium.
  - High discount rate heavily discounts long-run benefits of consolidation.
  - Infinite-lived agents assumption does not account explicitly for distribution of costs/benefits across generations.

### Conclusions — policy-relevant takeaways
- Key quantified findings:
  - Continuing current policies for two decades (delay) would entail a permanent output loss of around 17 percent relative to stabilizing federal debt at its pre-crisis level.
  - The associated drop in per-capita consumption and increased wealth concentration would cause a large average welfare loss in the long-run, equivalent to about 7 percent of lifetime consumption.
  - After accounting for transition costs, the average welfare gain from prompt fiscal consolidation is 0.8 percent of lifetime consumption (model baseline); with a 3 percent discount rate this gain increases to 5.9 percent.
- Policy implications:
  - Reducing promptly the level of public debt is significantly more important for activity and welfare than differences in the size of government or the detailed design of tax reform.
  - Even acknowledging the short-term costs of consolidation, on average fiscal consolidation is beneficial according to the model.
- Model limitations relevant for policy interpretation:
  - Closed economy assumption may be questionable given U.S. reliance on foreign financing, but assuming unaffected world interest rate may also be problematic.
  - The model abstracts from default risk, nominal issues, and real/nominal rigidities typical of new Keynesian frameworks; these omissions affect short-term cyclical analysis more than the long-term issues focused on here.
- Calibration point of note from the model:
  - Subjective discount factor β = 0.91 (such that r is 3% in the initial steady state).

*Source: Excerpt from the provided IMF PDF chapter/section.*

### 0.36           Kitao           (2008)

### _wp1238 - 0.36           Kitao           (2008)

### Model calibration and key parameters
- Depreciation rate δ: 0.06
  - Annual depreciation from Stokey and Rebelo (1995)
- Growth of the deterministic trend g: 1.02
  - The long-run growth rate in CBO projections
- External finance premium ξ: 1.7%
  - Average spread between risky (Baa) and risk free (TR10) bonds 2005-2006
- Tightness of the collateral constraint θ: 1.5
  - Liab./Assets (90’-07’) in the non-farm business sector in the Flow of Funds is 0.47
- Persistence labor productivity shock ρ_z: 0.9
  - Storesletten et al. (2004)
- Persistence entrepreneurial ability shock ρ_a: 0.9
  - Storesletten et al. (2004)
- St. dev. labor productivity shock σ_z: 0.2
  - Cagetti and De Nardi (2006)
- St. dev. entrepreneurial ability shock σ_a: 0.4

### Fiscal and tax calibration (2007 shares and rates)
- Transfers (% of GDP) T/GDP: 12%
  - Spending in health, pensions and income Security was 12% of GDP in 2007
- Other non-interest spending (% of GDP) G_other: 5.5%
  - Spending in defense, international affairs, justice, science, and technology in 2007
- Consumption tax τ_c: 0.7%
  - Revenues from excise taxes were 0.47% of GDP in 2007
- Payroll tax τ_p: 15.8%
  - Revenues from the payroll tax were 6.26% of GDP in 2007
- Income tax τ_y: 16.3%
  - Revenues from the income tax were 11.90% of GDP in 2007
- Debt (% of GDP) Debt/GDP: 36%
  - Debt in hands of the public in 2007

### Non-interest federal expenditures (2007, percent of GDP)
- Transfers: 12.0%
  - Medicaid: 1.9%
  - Medicare: 2.7%
  - Social Security: 4.2%
  - Veterans: 0.5%
  - Non-Mandatory Income Security: 0.4%
  - General retirement and disability: 0.1%
  - Federal employee retirement and disability: 0.7%
  - Food and nutrition assistance: 0.4%
  - Unemployment compensation: 0.2%
  - Supplemental Security Income: 0.2%
  - Family and Other Support Assistance: 0.2%
  - Earned Income Tax Credit: 0.3%
  - Child Tax Credit: 0.1%
  - Recovery Rebate Tax Credit: 0.1%
- Other noninterest spending: 5.5%
- National Defense: 4.0%
- International Affairs, Administration of Justice, General Government: 0.6%
- Energy, Transportation, Science, Technology: 1.3%
- Adjustment for not including Seigniorage and Tariffs: -0.4%

### Steady state comparison across scenarios
Scenarios: initial, passive adjust, active (1) adjust, active (2) adjust, and reported differences (delay w.r.t. each adjust).

- Debt to GDP ratio (D/GDP): 36% (initial, passive, active(1), active(2))
  - Delay scenarios reported: 200%, 164%, 164%, 164% (Difference rows indicate delay w.r.t. each adjust)
- Real interest rate r:
  - initial: 3.00%
  - passive: 4.17%
  - active (1): 4.10%
  - active (2): 4.21%
  - Delay differences: 8.85%, 468bps, 475bps, 464bps
- Aggregate capital stock K_bar:
  - initial: 0.202
  - passive: 0.181
  - active (1): 0.186
  - active (2): 0.182
  - Delay value: 0.150
  - Differences (delay w.r.t. each adjust): -17.3%, -19.5%, -17.7%
- Gross wage w_hat:
  - initial: 0.646
  - passive: 0.640
  - active (1): 0.641
  - active (2): 0.631
  - Delay value: 0.516
  - Differences: -19.4%, -19.5%, -18.2%
- Aggregate labor L_bar:
  - initial: 0.106
  - passive: 0.100
  - active (1): 0.102
  - active (2): 0.103
  - Delay value: 0.104
  - Differences: 4.1%, 2.3%, 1.5%
- GDP Y:
  - initial: 0.125
  - passive: 0.117
  - active (1): 0.120
  - active (2): 0.119
  - Delay value: 0.099
  - Differences: -15.7%, -17.7%, -17.1%
- Aggregate consumption C:
  - initial: 0.087
  - passive: 0.085
  - active (1): 0.087
  - active (2): 0.086
  - Delay value: 0.082
  - Differences: -3.5%, -5.8%, -5.4%
- % Workers:
  - initial: 73.9%
  - passive: 73.9%
  - active (1): 73.2%
  - active (2): 74.1%
  - Delay value: 87.8%
  - Differences: 13.9%, 14.5%, 13.7%
- % Entrepreneurs:
  - initial: 26.1%
  - passive: 26.1%
  - active (1): 26.8%
  - active (2): 25.9%
  - Delay value: 12.2%
  - Differences: -13.9%, -14.5%, -13.7%
- Consumption revenues, % of GDP:
  - initial: 0.5%
  - passive: 2.3%
  - active (1): 1.8%
  - active (2): 0.5%
  - Delay value: 5.4%
  - Differences: 3.1%, 3.6%, 4.9%
- Labor revenues, % of GDP:
  - initial: 6.3%
  - passive: 8.3%
  - active (1): 7.5%
  - active (2): 6.4%
  - Delay value: 11.2%
  - Differences: 3.0%, 3.8%, 4.8%
- Income revenues, % of GDP:
  - initial: 11.9%
  - passive: 14.0%
  - active (1): 13.2%
  - active (2): 15.5%
  - Delay value: 23.7%
  - Differences: 9.8%, 10.6%, 8.3%
- Total revenues, % of GDP:
  - initial: 18.6%
  - passive: 24.5%
  - active (1): 22.5%
  - active (2): 22.5%
  - Delay value: 40.4%
  - Differences: 15.9%, 17.9%, 17.9%
- Transfers, % of GDP T/GDP:
  - initial: 12.1%
  - passive: 17.5%
  - active (1): 16.8%
  - active (2): 16.8%
  - Delay value: 17.5%
  - Differences: 0.0%, 0.8%, 0.8%
- Other noninterest spending, % of GDP:
  - initial: 5.5%
  - passive: 5.5%
  - active (1): 4.2%
  - active (2): 4.2%
  - Delay value: 5.5%
  - Differences: 0.0%, 1.3%, 1.3%
- Primary expenditures, % of GDP:
  - initial: 17.6%
  - passive: 23.1%
  - active (1): 21.0%
  - active (2): 21.0%
  - Delay value: 23.0%
  - Differences: 0.0%, 2.0%, 2.0%
- Primary surplus, % of GDP:
  - initial: 1.1%
  - passive: 1.5%
  - active (1): 1.4%
  - active (2): 1.5%
  - Delay differences: 17.4%, 15.9%, 15.9% (reported under Interest Payments, % of GDP as well)
- Consumption tax rate τ_c:
  - initial: 0.7%
  - passive: 3.2%
  - active (1): 2.5%
  - active (2): 0.8%
  - Delay value: 6.5%
  - Differences: 3.4%, 4.0%, 5.8%
- Labor income tax rate τ_h:
  - initial: 15.8%
  - passive: 19.6%
  - active (1): 18.2%
  - active (2): 15.8%
  - Delay value: 23.0%
  - Differences: 3.4%, 4.8%, 7.3%
- Personal income tax rate τ_y:
  - initial: 16.3%
  - passive: 18.9%
  - active (1): 17.9%
  - active (2): 20.9%
  - Delay value: 22.1%
  - Differences: 3.1%, 4.2%, 1.2%
- Welfare (Consumption Equivalent):
  - Consumption equivalent change under delay vs adjust scenarios: -6.0% (delay), 7.1% (passive), 6.7% (active(1)), 0.0% (reference)
  - Note: "Consumption under the delay scenario should be permanently raised by x% for all agents in the economy to attain the same average utility than under the adjust scenarios (while leaving leisure unchanged)."

### Comparisons with external fiscal plans and projections
- CBO’s Long-Term Budget Outlook (figure referenced): projections for Revenues and Primary Spending over 1970–2035 and Debt held by the public scaling up to 200% ranges in delay scenarios.
- Table 4: CBO’s Alternative Fiscal Scenario and the Bowles-Simpson Commission’s plan (selected entries, in percent of GDP)
  - Revenue: Actual 14.9 (2010); CBO Alternative Fiscal Scenario 18.3 (2020) and 18.4 (2035); Bowles-Simpson Commission 20.6 (2020) and 21.0 (2035)
  - Outlays: Actual 24.3 (2010); CBO Alternative Fiscal Scenario 25.5 (2020) and 33.9 (2035); Bowles-Simpson Commission 21.8 (2020) and 21.0 (2035)
  - Primary spending: listed as 22.5 (actual), 21.3 (CBO 2020), 25.0 (CBO 2035), 18.6 (Bowles-Simpson)
  - Net Debt held by the public: 62.0 (2010), 97.0 (CBO 2020), 187.0 (CBO 2035), 60.0 (Bowles-Simpson 2020), 40.0 (Bowles-Simpson 2035)

### Distributional and welfare implications
- Figures report differences in the % of total wealth held by top percentiles between delay and passive adjust scenarios, and the discounted sum of utility in steady state by wealth percentiles.
- Figure indications:
  - Delay scenarios reduce the share of entrepreneurs and affect wealth shares across top percentiles (figures and axes presented).
  - Discounted sum of utility by wealth percentiles differs across delay and passive adjust, and across delay and adjust scenarios, with sizable negative deviations for many percentiles under delay.

### Model simulation outcomes (delay vs adjust)
- Fiscal variable dynamics (delay vs adjust; "adjust" corresponds to active (2) adjust scenario):
  - Debt to GDP: charts show delay paths rising substantially relative to adjust across 2010–2040 horizon (up to reported multiples such as 200% in delay steady comparisons).
  - Real transfers, Revenues to GDP, Primary spending to GDP, Primary balance to GDP: all charted showing divergence between delay and adjust scenarios over 2010–2040.
- Main macroeconomic variables (rescaled to initial steady state values; real interest rate not rescaled):
  - Output, Consumption, Capital Stock, Total effective labor, Real wage: charts indicate that delay scenarios produce lower levels of output, consumption, capital, labor, and wages relative to adjust scenarios over the 2010–2040 horizon.
  - Real interest rate: charts indicate higher real interest rates under delay relative to adjust across projection horizon.
- Entrepreneur share:
  - Charted percent of entrepreneurs over 2010–2040 shows decline under delay relative to adjust.
- Present discounted sum of utility by deciles:
  - Charts show that delay scenarios lower present discounted utility for many wealth percentiles relative to adjust scenarios.

### Key analytical takeaways (from model comparisons and figures)
- Delaying fiscal adjustment leads to:
  - Much higher debt-to-GDP ratios in steady state comparisons (reported delay values up to 200% vs 36% initial).
  - Higher real interest rates in steady state (e.g., delay differences reported as 468bps, 475bps, 464bps).
  - Reductions in aggregate capital stock, gross wages, GDP, and consumption relative to adjust scenarios (percent differences documented explicitly in steady state table).
  - Redistributional effects: lower share of entrepreneurs, changes in wealth concentration among top percentiles, and lower discounted utility for a broad set of wealth percentiles.
- Active adjustment scenarios (active (1) and active (2)) yield higher revenues, lower debt, and smaller macroeconomic losses relative to delay.

*Italic: Content derived from _wp1238 - 0.36           Kitao           (2008) (source PDF content provided).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1238.pdf_