Assessing the Impact and Phasing of Multi-year Fiscal Adjustment: A General Framework
IMF Working Papers, August 21, 2013
Source details
- Canonical URL
- Assessing the Impact and Phasing of Multi-year Fiscal Adjustment: A General Framework
Other formats
Bibliographic details
- Authors: Ran Bi, Haonan Qu, James Roaf
- Published: August 21, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484318669.001
Framework and methodology
- Provides a general framework to assess output and debt dynamics of an economy undertaking multi-year fiscal adjustment.
- Allows country-specific assumptions about:
- the magnitude and persistence of fiscal multipliers,
- hysteresis effects,
- endogenous financing costs.
- Designed to inform macro projections and shed light on appropriate phasing of fiscal consolidation (front-loaded versus back-loaded).
- Applied to stylized advanced and emerging economy examples.
Major findings
- For a highly-indebted economy undertaking large multi-year fiscal consolidation, high multipliers do not always argue against frontloaded adjustment.
- The case for more gradual or back-loaded adjustment is strongest when hysteresis effects are in play, but this must be balanced against implications for debt sustainability.
- Application to actual country examples tends to cast doubt on claims that very large multipliers have been operating post-crisis.
- It appears that GDP forecast errors for Greece may have been due more to over-optimism on potential growth estimates than to underestimating fiscal multipliers.
Policy implications and considerations
- Phasing decisions (front-loaded vs. back-loaded) should weigh:
- country-specific fiscal multiplier estimates,
- the presence and magnitude of hysteresis effects,
- endogenous financing cost responses,
- debt sustainability constraints for highly indebted economies.
- High multipliers alone do not automatically imply that consolidation should be back-loaded; assessment must consider debt dynamics and sustainability trade-offs.
Application and scope
- Framework applied to stylized advanced and emerging economy examples to illustrate interactions among multipliers, hysteresis, and financing costs.
- Also applied to actual country examples to evaluate post-crisis multiplier claims and forecast errors.
Content in this bundle
- Microsoft Word - DMSDR1S-#5095902-v9-SPREM_2013_WP_Fiscal_Multipliers_-_February.DOCX