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Global Fiscal Consolidation

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Author Info

  • Warwick J. McKibbin

    ()
    (Research School of Economics, Australian National University, ANU College of Business and Economics, and The Brookings Institution)

  • Andrew B. Stoeckel

    ()
    (Centre for Applied Macroeconomic Analysis, Australian National University, ANU College of Business and Economics)

Abstract

The buildup in government debt in response to the “great recession,” has raised a number of policy dilemmas for individual countries as well as the world as a whole. The recent need for a change of fiscal policy stance has fuelled debates about the impact of fiscal consolidation on domestic economies that are tightening, the flow-on effects to the world economy, and also about how much tightening there should be and how quickly it should happen. This paper explores these issues in a global framework focusing on the national and global consequences of coordinated fiscal consolidation. It explores the implications this fiscal adjustment might have on country risk premia and what happens if all countries coordinate their fiscal adjustment except the United States. A coordinated fiscal consolidation in the industrial world that is not accompanied by U.S. actions is likely to lead to a substantial worsening of trade imbalances globally as the release of capital in fiscally contracting economies flows into the U.S. economy, appreciates the U.S. dollar, and worsens the current account position of the United States. The scale of this change is likely to be sufficient to substantially increase the probability of a trade war between the United States and other economies. To avoid this outcome, a coordinated fiscal adjustment is clearly in the interest of the global economy. © 2012 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Asian Economic Papers.

Volume (Year): 11 (2012)
Issue (Month): 1 (February)
Pages: 124-146

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Handle: RePEc:tpr:asiaec:v:11:y:2012:i:1:p:124-146

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Related research

Keywords: Global Financial Crisis; Fiscal Policy; DSGE models;

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References

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  1. Cogan, John F. & Cwik, Tobias J. & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," CFS Working Paper Series 2009/17, Center for Financial Studies (CFS).
  2. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
  3. Woodford, Michael, 2010. "Simple Analytics of the Government Expenditure Multiplier," CEPR Discussion Papers 7704, C.E.P.R. Discussion Papers.
  4. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
  5. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  6. Reinhart, Carmen & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers 7661, C.E.P.R. Discussion Papers.
  7. Checherita-Westphal, Cristina & Rother, Philipp, 2010. "The impact of high and growing government debt on economic growth: an empirical investigation for the euro area," Working Paper Series 1237, European Central Bank.
  8. Renee Fry & Callum Jones & Christopher Kent, 2010. "Inflation in an Era of Relative Pirce Shocks," CAMA Working Papers 2010-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  9. repec:fth:coluec:754 is not listed on IDEAS
  10. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
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Cited by:
  1. McKibbin, Warwick J. & Wilcoxen, Peter J., 2013. "A Global Approach to Energy and the Environment," Handbook of Computable General Equilibrium Modeling, Elsevier.

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