The Challenge of Debt Reduction during Fiscal Consolidation

Author/Editor:

Luc Eyraud ; Anke Weber

Publication Date:

March 8, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Studies suggest that fiscal multipliers are currently high in many advanced economies. One important implication is that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output. Although this effect is not long-lasting and debt eventually declines, it could be an issue if financial markets focus on the short-term behavior of the debt ratio, or if country authorities engage in repeated rounds of tightening in an effort to get the debt ratio to converge to the official target. We discuss whether these problems could be addressed by setting and monitoring debt targets in cyclically-adjusted terms.

Series:

Working Paper No. 2013/067

Subject:

Fiscal consolidation Fiscal multipliers Fiscal policy Fiscal stance Public debt

English

Publication Date:

March 8, 2013

ISBN/ISSN:

9781475553864/1018-5941

Stock No:

WPIEA2013067

Pages:

36

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