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How Delaying Fiscal Consolidation Affects the Present Value of GDP

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  • Mr. Kevin Fletcher
  • Mr. Damiano Sandri

Abstract

We develop a simple model to examine the conditions under which delaying fiscal consolidation can affect the present value of GDP via the fiscal stance’s effects on the output gap and hysteresis. We find that the absolute size of the fiscal multiplier—the focus of much empirical investigation and policy debate—is likely inconsequential in this regard. Rather, what matters is the degree to which the multiplier during the initial period of fiscal stimulus differs from the multiplier when the stimulus is withdrawn. If the multiplier is constant over time, delaying consolidation is unlikely to significantly boost the present value of GDP via effects on the output gap and hysteresis. The potential success of such efforts relies instead on exploiting time-variation in multipliers.

Suggested Citation

  • Mr. Kevin Fletcher & Mr. Damiano Sandri, 2015. "How Delaying Fiscal Consolidation Affects the Present Value of GDP," IMF Working Papers 2015/052, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2015/052
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    Cited by:

    1. Javier Andres & Oscar Arce & Dominik Thaler & Carlos Thomas, 2020. "When Fiscal Consolidation Meets Private Deleveraging," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 214-233, July.
    2. Keränen, Henri & Kuusi, Tero, 2016. "The EU’s Fiscal Targets and Their Economic Impact in Finland," ETLA Working Papers 33, The Research Institute of the Finnish Economy.

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