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The Economic Effects of Fiscal Consolidation with Debt Feedback

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  • Marcello M. Estevão
  • Issouf Samaké
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    Abstract

    The past several years of recession and slow recovery have raised much interest on the effect of fiscal stimulus on economic activity, even as high public debts in many countries would call for fiscal consolidation. To evaluate the delicate balance between stimulus and consolidation requires measuring the size of fiscal multipliers, which often depends on having quarterly data so that exogenous fiscal policy shocks can be identified. We estimate fiscal multipliers using a novel methodology for identifying fiscal shocks within a structural vector autoregressive approach using annual data while controling for debt feedback effects. The estimation focuses on regions with scarce quarterly data (mostly low-income countries), and uses results for advanced economies, emerging market countries, and other broad groupings for which alternative estimates are available to validate the methodology. Differently from advanced and emerging market economies, fiscal consolidation in low-income countries has only a small temporary negative effect on growth while raising medium-term output. Shifting the composition of public spending toward capital expenditure further supports long-run growth.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/136.

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    Length: 51
    Date of creation: 31 May 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/136

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    Related research

    Keywords: Fiscal consolidation; Central America; Fiscal policy; Public debt; Cross country analysis; Identification; Fiscal mulpiliers; SVECM; fiscal multipliers; tax revenue; government spending; fiscal stimulus; capital expenditure; fiscal shocks; tax collection; spending cuts; discretionary fiscal policy; tax rates; tax base; cyclical fiscal policy; tax revenues; expenditure cuts; budget constraint; fiscal data; fiscal variables; tax increases; public spending; government budget; fiscal policy responses; taxation; tax changes; fiscal outcomes; tax administration; public expenditures; fiscal accounts; government budget constraint; government revenue; fiscal sustainability; tax revenue increases; government expenditures; fiscal stance; fiscal developments; composition of public spending; fiscal stabilization; budget constraints; fiscal expansions; tax collections; fiscal deficit; defense spending; tax bases;

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    References

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    1. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper 1999-28, Tilburg University, Center for Economic Research.
    2. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the Effects of Fiscal Policy," NBER Working Papers 12822, National Bureau of Economic Research, Inc.
    3. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
    4. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc.
    5. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98 National Bureau of Economic Research, Inc.
    6. Ilzetzki, Ethan, 2011. "Fiscal policy and debt dynamics in developing countries," Policy Research Working Paper Series 5666, The World Bank.
    7. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
    8. Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2012. "A Pitfall with DSGE-Based, Estimated, Government Spending Multipliers," TSE Working Papers 12-289, Toulouse School of Economics (TSE).
    9. Giovanni Callegari & Giovanni Melina & Nicoletta Batini, 2012. "Successful Austerity in the United States, Europe and Japan," IMF Working Papers 12/190, International Monetary Fund.
    10. Anja Baum & Marcos Poplawski-Ribeiro & Anke Weber, 2012. "Fiscal Multipliers and the State of the Economy," IMF Working Papers 12/286, International Monetary Fund.
    11. Caldara, Dario & Kamps, Christophe, 2008. "What are the effects of fiscal policy shocks? A VAR-based comparative analysis," Working Paper Series 0877, European Central Bank.
    12. Alan J. Auerbach & Yuriy Gorodnichenko, 2013. "Output Spillovers from Fiscal Policy," American Economic Review, American Economic Association, vol. 103(3), pages 141-46, May.
    13. Roberto Perotti, 2011. "The Effects of Tax Shocks on Output: Not So Large, But Not Small Either," NBER Working Papers 16786, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Sohrab Rafiq, 2013. "The Growth and Stabilization Properties of Fiscal Policy in Malaysia," IMF Working Papers 13/149, International Monetary Fund.

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