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Debt Reduction, Fiscal Adjustment, and Growth in Credit-Constrained Economies

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  • Emanuele Baldacci
  • Sanjeev Gupta
  • Carlos Mulas-Granados
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    Abstract

    This paper assesses the effects of fiscal consolidations associated with public debt reduction on medium-term output growth during periods of private debt deleveraging. The analysis covers 107 countries and 79 episodes of public debt reduction driven by discretionary fiscal adjustments during 1980–2012. It shows that expenditure-based, front-loaded fiscal adjustments can dampen growth when there are credit supply restrictions. Instead, fiscal adjustments that are gradual and rely on a mix of revenue and expenditure measures can support output expansion, while reducing public debt. In this context, protecting public investment is critical for medium-term growth, as is the implementation of supply-side, productivity-enhancing reforms.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/238.

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    Length: 37
    Date of creation: 22 Nov 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/238

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    Related research

    Keywords: Public debt; Fiscal consolidation; Debt reduction; Fiscal policy; Credit restraint; Economic growth; Cross country analysis; spending cuts; expansionary fiscal; expenditure cuts; public spending; fiscal contraction; fiscal deficit; expansionary fiscal contraction; tax rates; fiscal consolidations; budget composition; fiscal multipliers; budget constraint; tax revenues; fiscal variables; public expenditures; fiscal conditions; taxation; loose fiscal policy; fiscal contractions; fiscal imbalances; tax base; discretionary fiscal policy; fiscal reforms; government budget; expansionary fiscal contractions; government spending; debt service; fiscal affairs department; fiscal institutions; budget balances; expansionary fiscal policies; tax income; fiscal position; expenditure composition; tax increases; aggregate demand; tax avoidance; government expenditure; fiscal tightening; budget deterioration;

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    1. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 4(2), pages 1-27, May.
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    4. Eduardo Lora, 2001. "Structural reforms in Latin America: What has been reformed and how to measure it?," Research Department Publications, Inter-American Development Bank, Research Department 4287, Inter-American Development Bank, Research Department.
    5. Reinhart, Carmen M. & Rogoff, Kenneth S., 2010. "Growth in a Time of Debt," Scholarly Articles 11129154, Harvard University Department of Economics.
    6. S. M. Ali Abbas & Bernardin Akitoby & Jochen R. Andritzky & Helge Berger & Takuji Komatsuzaki & Justin Tyson, 2013. "Dealing with High Debt in an Era of Low Growth," IMF Staff Discussion Notes 13/7, International Monetary Fund.
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    8. Daniel Leigh & Andrea Pescatori & Jaime Guajardo, 2011. "Expansionary Austerity New International Evidence," IMF Working Papers 11/158, International Monetary Fund.
    9. Thomas Herndon & Michael Ash & Robert Pollin, 2013. "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo ff," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp322, Political Economy Research Institute, University of Massachusetts at Amherst.
    10. Luc Eyraud & Anke Weber, 2013. "The Challenge of Debt Reduction during Fiscal Consolidation," IMF Working Papers 13/67, International Monetary Fund.
    11. Tagkalakis, Athanasios, 2008. "The effects of fiscal policy on consumption in recessions and expansions," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1486-1508, June.
    12. Afonso, António & Grüner, Hans Peter & Kolerus, Christina, 2010. "Fiscal policy and growth: do financial crises make a difference?," Working Paper Series, European Central Bank 1217, European Central Bank.
    13. Sanjeev Gupta & Carlos Mulas-Granados & Emanuele Baldacci, 2009. "How Effective is Fiscal Policy Response in Systemic Banking Crises?," IMF Working Papers 09/160, International Monetary Fund.
    14. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
    15. Salvador Barrios & Sven Langedijk & Lucio Pench, 2010. "EU fiscal consolidation after the financial crisis. Lessons from past experiences," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 418, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    16. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
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