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The Challenge of Debt Reduction during Fiscal Consolidation

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Author Info

  • Luc Eyraud
  • Anke Weber

Abstract

Studies suggest that fiscal multipliers are currently high in many advanced economies. One important implication is that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output. Although this effect is not long-lasting and debt eventually declines, it could be an issue if financial markets focus on the short-term behavior of the debt ratio, or if country authorities engage in repeated rounds of tightening in an effort to get the debt ratio to converge to the official target. We discuss whether these problems could be addressed by setting and monitoring debt targets in cyclically-adjusted terms.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/67.

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Length: 36
Date of creation: 08 Mar 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/67

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Keywords: Fiscal policy; Debt reduction; Fiscal consolidation; Public debt; Developed countries; fiscal multipliers; fiscal tightening; fiscal adjustment; fiscal shocks; fiscal stance; structural fiscal; primary deficit; public finances; fiscal balance; fiscal target; fiscal consolidations; fiscal position; fiscal sustainability; budget constraint; government spending; discretionary fiscal policy; primary balance ratio; fiscal adjustments; fiscal measures; primary expenditure; fiscal deficit; budget deficit; budgetary discipline; fiscal variables; primary fiscal deficit; government budget; fiscal consolidation episodes; public expenditures; fiscal balances; taxation; tax changes; fiscal rule; budget balances; fiscal affairs department; fiscal consolidation on growth; government budget constraint; fiscal adjustment packages; fiscal targets; fiscal performance; fiscal aggregates; fiscal rules; fiscal factors;

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References

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  1. Alan J. Auerbach & Yuriy Gorodnichenko, 2011. "Fiscal Multipliers in Recession and Expansion," NBER Working Papers 17447, National Bureau of Economic Research, Inc.
  2. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2009. "Fiscal Foresight and Information Flows," NBER Working Papers 14630, National Bureau of Economic Research, Inc.
  3. Reda, Cherif & Fuad, Hasanov, 2010. "Public Debt Dynamics and Debt Feedback," MPRA Paper 27918, University Library of Munich, Germany.
  4. Roberto Perotti, 2008. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 169-226 National Bureau of Economic Research, Inc.
  5. Forni, Lorenzo & Monteforte, Libero & Sessa, Luca, 2009. "The general equilibrium effects of fiscal policy: Estimates for the Euro area," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 559-585, April.
  6. Carlo Favero & Francesco Giavazzi, 2007. "Debt and the Effects of Fiscal Policy," NBER Working Papers 12822, National Bureau of Economic Research, Inc.
  7. Favero, Carlo A. & Giavazzi, Francesco, 2009. "How Large Are the Effects of Tax Changes?," CEPR Discussion Papers 7439, C.E.P.R. Discussion Papers.
  8. Anja Baum & Marcos Poplawski-Ribeiro & Anke Weber, 2012. "Fiscal Multipliers and the State of the Economy," IMF Working Papers 12/286, International Monetary Fund.
  9. Nitika Bagaria & Dawn Holland & John Van Reenen, 2012. "Fiscal consolidation during a depression," LSE Research Online Documents on Economics 47524, London School of Economics and Political Science, LSE Library.
  10. Hess Chung & Eric M. Leeper, 2007. "What Has Financed Government Debt?," NBER Working Papers 13425, National Bureau of Economic Research, Inc.
  11. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
  12. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2011. "Foresight and Information Flows," NBER Working Papers 16951, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Mthuli Ncube & Zuzana Brixiová, 2013. "Public Debt Sustainability in Africa: Building Resilience and Challenges Ahead," William Davidson Institute Working Papers Series wp1053, William Davidson Institute at the University of Michigan.
  2. Gabriela Lopes de Castro & Ricardo Mourinho Félix & Paulo Júlio & José R. Maria, 2013. "Fiscal multipliers in a small euro area economy: How big can they get in crisis times?," Working Papers w201311, Banco de Portugal, Economics and Research Department.
  3. Emanuele Baldacci & Sanjeev Gupta & Carlos Mulas-Granados, 2012. "Reassessing the fiscal mix for successful debt reduction," Economic Policy, CEPR & CES & MSH, vol. 27(71), pages 365-406, 07.
  4. Jesús Ferreiro & Carmen Gómez & Felipe Serrano, 2013. "Mistakes in the Fiscal Policy in Spain before the Crisis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(5), pages 577-592, September.
  5. Emanuele Baldacci & Sanjeev Gupta & Carlos Mulas-Granados, 2013. "Debt Reduction, Fiscal Adjustment, and Growth in Credit-Constrained Economies," IMF Working Papers 13/238, International Monetary Fund.
  6. repec:cge:warwcg:158 is not listed on IDEAS
  7. Miller, Marcus & Zhang, Lei, 2013. "Fiscal consolidation: Dr Pangloss meets Mr Keynes," CAGE Online Working Paper Series 159, Competitive Advantage in the Global Economy (CAGE).
  8. Jesper Jespersen, 2013. "The Euro: Why it Went Wrong and How to Get On?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(68), pages 23-42, June.
  9. Manos Matsaganis & Chrysa Leventi, 2014. "Distributive Effects of the Crisis and Austerity in Seven EU Countries," ImPRovE Working Papers 14/04, Herman Deleeck Centre for Social Policy, University of Antwerp.

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