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Fiscal tightening after the crisis. A scenario analysis for Poland

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Abstract

Poland has experienced a great deal of worsening of its fiscal situation following the economic slowdown of 2008–2009 caused by the worldwide financial crisis. General government deficit reached around 8% of GDP in 2010 both as a result of lower economic activity but also due to structural loosening that took part in the period immediately preceding the crisis. We attempt to assess which of the two contrasting fiscal consolidation strategies: expenditure-versus revenue-focused may be considered as preferable from the point of view of economic activity. The assessment is carried out using a recursive dynamic computable general equilibrium model. Our results show that, while the tightening has a negative effect on consumption, in the short run, the reaction of private consumption, employment and GDP in the medium run will greatly depend on the flexibility of the labour market and the behavior of private investment. We conclude that the expenditure-focused tightening scheme is consistently superior under all closures to the revenue--oriented scenario.

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File URL: http://www.bankikredyt.nbp.pl/content/2011/03/bik_03_2011_02_art.pdf
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Bibliographic Info

Article provided by National Bank of Poland, Economic Institute in its journal Bank i Kredyt.

Volume (Year): 42 (2011)
Issue (Month): 3 ()
Pages: 33-66

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Handle: RePEc:nbp:nbpbik:v:42:y:2011:i:3:p:33-66

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Keywords: fiscal tightening; computable general equilibrium;

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References

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  1. Adi Brender & Allan Drazen, 2008. "How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Panel of Countries," American Economic Review, American Economic Association, vol. 98(5), pages 2203-20, December.
  2. Alberto F. Alesina & Silvia Ardagna, 2009. "Large Changes in Fiscal Policy: Taxes Versus Spending," NBER Working Papers 15438, National Bureau of Economic Research, Inc.
  3. Stephen Snudden & Vladimir Klyuev, 2011. "Effects of Fiscal Consolidation in the Czech Republic," IMF Working Papers 11/65, International Monetary Fund.
  4. Antonio Afonso, 2010. "Expansionary fiscal consolidations in Europe: new evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 17(2), pages 105-109.
  5. Douglas Laxton & Susanna Mursula & Kevin Clinton & Michael Kumhof, 2010. "Budget Consolidation," IMF Working Papers 10/163, International Monetary Fund.
  6. Alessandro Turrini, 2004. "Public investment and the EU fiscal framework," European Economy - Economic Papers 202, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  7. Lambertini, Luisa & Tavares, Jose, 2002. "Exchange Rates and Fiscal Adjustments: Evidence from the OECD and Implications for EMU," FEUNL Working Paper Series wp412, Universidade Nova de Lisboa, Faculdade de Economia.
  8. Werner Roeger & Jan Veld & Lukas Vogel, 2010. "Fiscal consolidation in Germany," Intereconomics: Review of European Economic Policy, Springer, vol. 45(6), pages 364-371, November.
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Cited by:
  1. Jan Hagemejer & Zbigniew Żółkiewski, 2013. "Short-run impact of the implementation of EU climate and energy package for Poland: computable general equilibrium model simulations," Bank i Kredyt, National Bank of Poland, Economic Institute, vol. 44(3), pages 237-260.

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