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The Composition of Fiscal Consolidation Matters

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  • Alejandro D. Guerson
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    Abstract

    This paper evaluates policy alternatives to achieve permanent fiscal consolidation in Hungary, based on a general equilibrium calibration. The main finding is that the composition of the consolidation, as determined by the mix of revenue and expenditure measures, has important implications for growth, employment, investment, and other key macroeconomic variables. A reduction in current expenditures yields the smallest GDP contraction in the short term and can increase output in the long term by stimulating labor participation and private investment. On the other end of the spectrum, a consolidation of government investment and corporate taxes are the most costly, as disincentives for private investment result in protracted declines in GDP that compound over time to GDP losses that are multiple times the initial size of the consolidation.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/207.

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    Length: 29
    Date of creation: 04 Oct 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/207

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    Related research

    Keywords: Fiscal consolidation; Hungary; Fiscal policy; Economic models; DSGE models; overlapping generations households; liquidity constrained households; financial accelerator;

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    1. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
    2. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
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    7. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 78(1), pages 156-190, October.
    8. Szilárd Benk & Zoltán M. Jakab, 2012. "Non-Keynesian Effects of Fiscal Consolidation: An Analysis with an Estimated DSGE Model for the Hungarian Economy," OECD Economics Department Working Papers 945, OECD Publishing.
    9. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(6), pages 1702-1725, September.
    10. Roberto Perotti, 2008. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2007, Volume 22, pages 169-226 National Bureau of Economic Research, Inc.
    11. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
    12. Alan S. Blinder, 1978. "Temporary Income Taxes and Consumer Spending," NBER Working Papers 0283, National Bureau of Economic Research, Inc.
    13. Beetsma, Roel & Jensen, Henrik, 2002. "Monetary and Fiscal Policy Interactions in a Micro-Funded Model of a Monetary Union," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3591, C.E.P.R. Discussion Papers.
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