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Fiscal Consolidation in Israel: A Global Fiscal Model Perspective

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Author Info

  • Natan P. Epstein
  • Selim Elekdag
  • Marialuz Moreno Badia

Abstract

Fiscal consolidation has become an important policy prescription for many emerging market countries (EMCs), particularly for the highly indebted ones. Although prudent fiscal policies tend to reduce vulnerabilities, their implementation is usually postponed. This paper represents, to the best of our knowledge, one of the first attempts in the literature to quantify the costs of delaying fiscal consolidation in an EMC. In particular, using the IMF's Global Fiscal Model (GFM), we find that early consolidation through expenditure cuts would result in a substantial increase in Israel's long-term output growth relative to the case with delayed fiscal adjustment. Using an alternative fiscal instrument, we find that delaying tax cuts would result in cumulative real GDP that is much larger than otherwise.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/253.

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Length: 65
Date of creation: 01 Nov 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/253

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Related research

Keywords: Fiscal consolidation; Fiscal reforms; Tax reductions; Government expenditures; Public debt; Gross domestic product; Economic growth; Emerging markets; Economic models;

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References

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  1. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
  2. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  3. International Monetary Fund, 2004. "Israel: Report on Observance of Standards and Codes - Fiscal Transparency Module," IMF Staff Country Reports 04/112, International Monetary Fund.
  4. Perotti, Roberto, 1998. " The Political Economy of Fiscal Consolidations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 367-94, March.
  5. Dirk Muir & Douglas Laxton & Dennis P. J. Botman & Andrei Romanov, 2006. "A New-Open-Economy Macro Model for Fiscal Policy Evaluation," IMF Working Papers 06/45, International Monetary Fund.
  6. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
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Cited by:
  1. Steven A. Symansky & Xavier Debrun & Natan P. Epstein, 2008. "A New Fiscal Rule: Should Israel go Swiss?," IMF Working Papers 08/87, International Monetary Fund.

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