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Successful Austerity in the United States, Europe and Japan

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Author Info

  • Giovanni Callegari
  • Giovanni Melina
  • Nicoletta Batini

Abstract

The output effects of 2009 fiscal expansions have been hotly debated. But the discussion of fiscal multipliers is even more relevant now that several European countries have had to quickly retract their stimulus measures in an effort to regain market confidence. Using regime-switching VARs we estimate the impact of fiscal adjustment on the United States, Europe and Japan allowing for fiscal multipliers to vary across recessions and booms. We also estimate ex ante probabilities of recessions derived in association with different-sized and different types of consolidation shocks (expenditure- versus tax-based). We use these estimates to understand how consolidations should be designed to be most effective in terms of permanently and rapidly reducing a country’s debt-to-GDP ratio. The main finding is that smooth and gradual consolidations are to be preferred to frontloaded or aggressive consolidations, especially for economies in recession facing high risk premia on public debt, because sheltering growth is key to the success of fiscal consolidation in these cases.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/190.

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Length: 61
Date of creation: 01 Jul 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/190

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Related research

Keywords: Fiscal consolidation; Adjustment process; External shocks; Government expenditures; Public debt; Risk management;

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References

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  1. Raffaella Basile & Bruno Chiarini & Elisabetta Marzano, 2011. "Can we Rely upon Fiscal Policy Estimates in Countries with Unreported Production of 15 Per Cent (or more) of GDP?," CESifo Working Paper Series 3521, CESifo Group Munich.
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  7. Shafik Hebous, 2011. "The Effects Of Discretionary Fiscal Policy On Macroeconomic Aggregates: A Reappraisal," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 674-707, 09.
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  11. Eric M. Leeper, Todd B. Walker, And Shu-Chun S. Yang, 2009. "Government Investment And Fiscal Stimulus In The Short And Long Runs," Caepr Working Papers 2009-011, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  12. Shu-Chun S. Yang & Todd B. Walker & Eric M. Leeper, 2010. "Government Investment and Fiscal Stimulus," IMF Working Papers 10/229, International Monetary Fund.
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  14. Rudiger Ahrend & Pietro Catte & Robert W.R. Price, 2006. "Interactions Between Monetary and Fiscal Policy: How Monetary Conditions Affect Fiscal Consolidation," OECD Economics Department Working Papers 521, OECD Publishing.
  15. Anja Baum & Marcos Poplawski-Ribeiro & Anke Weber, 2012. "Fiscal Multipliers and the State of the Economy," IMF Working Papers 12/286, International Monetary Fund.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Gli effetti recessivi dei tagli alla spesa pubblica
    by keynesblog in Keynes Blog on 2012-08-29 09:21:06
  2. The Strange Case of Dr IMF and Mr Troika
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-08-31 07:46:34
  3. The Strange Case of Dr IMF and Mr Troika
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-08-31 07:46:34
  4. Empeñados en una estrategia fiscal estúpida
    by Santiago Lago Peñas in Res Publica on 2012-12-10 21:21:26
  5. Monetary Alchemy, Fiscal Science
    by jfrankel in Jeff Frankels Weblog on 2013-01-26 17:16:19
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