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The macroeconomic effects of the Euro Area's fiscal consolidation

Author

Listed:
  • Rannenberg, Ansgar

    (Central Bank of Ireland)

  • Schoder, Christian

    (Vienna University of Economics and Business)

  • Strasky, Jan

    (Organisation for Economic Co-operation and Development)

Abstract

This economic letter summarizes research by Rannenberg et al. (2015), who simulate the Euro Area's fiscal consolidation between 2011 and 2013 by employing two DSGE models used by the ECB and the European Commission. The cumulative multiplier over the 2011-2013 period amounts to 0.7 and 1.0 in the baseline, but increases to 1.3 with a reasonably calibrated nancial accelerator and a crisis-related increase of the share of credit constrained households. In the latter scenario, fiscal consolidation would be largely responsible for the further decline in GDP relative to its pre-crisis trend during 2011-2013. Postponing the fiscal consolidation to a period of unconstrained monetary policy (until after the economic recovery) would have avoided most of these losses.

Suggested Citation

  • Rannenberg, Ansgar & Schoder, Christian & Strasky, Jan, 2015. "The macroeconomic effects of the Euro Area's fiscal consolidation," Economic Letters 10/EL/15, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:10/el/15
    as

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    File URL: https://centralbank.ie/docs/default-source/publications/economic-letters/economic-letter---vol-2015-no-10.pdf?sfvrsn=10
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    References listed on IDEAS

    as
    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    2. Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2543-2583, August.
    3. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," American Economic Review, American Economic Association, vol. 103(3), pages 117-120, May.
    4. Ratto, Marco & Roeger, Werner & Veld, Jan in 't, 2009. "QUEST III: An estimated open-economy DSGE model of the euro area with fiscal and monetary policy," Economic Modelling, Elsevier, vol. 26(1), pages 222-233, January.
    5. Broda, Christian & Parker, Jonathan A., 2014. "The Economic Stimulus Payments of 2008 and the aggregate demand for consumption," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 20-36.
    6. Sebastian Gechert & Ansgar Rannenberg, 2014. "Are Fiscal Multipliers Regime-Dependent? A Meta Regression Analysis," IMK Working Paper 139-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    7. Rannenberg, Ansgar & Schoder, Christian & Strasky, Jan, 2015. "The macroeconomic effects of the Euro Area's fiscal consolidation 2011-2013: A Simulation-based approach," Research Technical Papers 03/RT/15, Central Bank of Ireland.
    8. Giovanni Callegari & Mr. Giovanni Melina & Nicoletta Batini, 2012. "Successful Austerity in the United States, Europe and Japan," IMF Working Papers 2012/190, International Monetary Fund.
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