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The macroeconomics of fiscal consolidations in euro area countries

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Author Info

  • Forni, Lorenzo
  • Gerali, Andrea
  • Pisani, Massimiliano

Abstract

We simulate a currency union dynamic general equilibrium model to assess the macroeconomic implications of permanently reducing the public debt-to-gross domestic product (GDP) ratio in euro area countries. We obtain the following results. First, tax distortions are quantitatively significant. Second, the best fiscal consolidation strategy is to permanently reduce both expenditures and tax rates. Third, under such a consolidation strategy the transition is generally not costly, as the GDP and investment would grow, while private consumption would not fall. Finally, spillovers to the rest of the euro area are generally expansionary.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 9 (September)
Pages: 1791-1812

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:9:p:1791-1812

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Fiscal consolidation Monetary union Distortionary taxation General equilibrium models;

References

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