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Fiscal Consolidation: Part 2. Fiscal Multipliers and Fiscal Consolidations

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  • Ray Barrell
  • Dawn Holland
  • Ian Hurst

Abstract

This paper looks at various aspects of fiscal consolidation in 18 OECD economies. The prospects for fiscal consolidation depend upon the problems the country may face with its debt stock, the political will to deal with these problems and on the costs of consolidation. The analysis is based on a series of simulations using the National Institute Global Econometric Model, NiGEM. The properties of the NiGEM model are discussed first. Although the model is estimated it has a strong role for expectations and can be run under different modes of expectations formation. This allows a decomposition of the factors that might affect the results. Temporary and permanent shifts in fiscal policy are assessed as well as the potential impact of fiscal consolidation plans under different monetary and fiscal feedback rules and different modes of expectations formation. If fiscal policy is expected to be tightened in the future, then long rates will fall now, and perhaps even induce a short-term expansion of output. Expansionary fiscal contractions of this sort are rare, however, and none are anticipated with the programmes that are investigated. Consolidation budgétaire : Partie 2. Multiplicateurs budgétaires et assainissement des finances publiques Ce document examine divers aspects de l’assainissement des finances publiques dans 18 pays de l’OCDE. Le potentiel de consolidation budgétaire dépend du montant de la dette d’un pays et des problèmes qui peuvent en résulter, de la volonté politique de traiter ces problèmes et des coûts du redressement. L’analyse s’appuie sur un ensemble de simulations fondées sur le modèle économétrique mondial de l'Institut de recherche économique et sociale du Royaume-Uni (NiGEM). Les auteurs examinent en premier lieu les caractéristiques du modèle NiGEM. Même si ce modèle procède par estimation, il conditionne fortement les anticipations et peut être appliqué à différents modes de formation des anticipations. Cela permet de décomposer les facteurs susceptibles d’influer sur les résultats. Les auteurs évaluent ensuite les modifications temporaires et permanentes de la politique budgétaire, ainsi que l’impact potentiel des plans de redressement budgétaire selon différentes règles de rétroaction budgétaire et monétaire et différents modes de formation des anticipations. Si l’on s’attend à un durcissement de la politique budgétaire à l’avenir, les taux longs baisseront immédiatement, ce qui pourrait même induire une expansion à court terme de la production. Néanmoins, les contractions budgétaires expansionnistes de ce type sont exceptionnellement rares, et les programmes étudiés n’en prévoient aucune.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 933.

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Date of creation: 22 Feb 2012
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Handle: RePEc:oec:ecoaaa:933-en

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Keywords: fiscal multipliers; large scale structural macro models; rational expectations; budget consolidation in the OECD; modèles macroéconomiques structurels à grande échelle; multiplicateurs budgétaires; anticipations rationnelles; redressement budgétaire dans l’OCDE;

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  1. Anti-Austerity Policy: Independence or Devolution?
    by Brian Ashcroft in Scottish Economy Watch on 2012-07-02 13:41:38
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Cited by:
  1. Boris Cournède & Antoine Goujard & Álvaro Pina, 2013. "How to Achieve Growth- and Equity-friendly Fiscal Consolidation?: A Proposed Methodology for Instrument Choice with an Illustrative Application to OECD Countries," OECD Economics Department Working Papers 1088, OECD Publishing.
  2. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
  3. Iana Liadze & Dawn Holland, 2012. "The impact of fuel duty on the macro-economy," NIESR Discussion Papers, National Institute of Economic and Social Research 11126, National Institute of Economic and Social Research.
  4. Riccardo Fiorentini & Guido Montani, 2013. "Beyond Austerity A European Recovery Policy Is Feasible," Working Papers 06/2013, University of Verona, Department of Economics.
  5. Sutherland, Douglas, 2012. "Fiscal Consolidation Needs and Implications for Growth," MPRA Paper 38745, University Library of Munich, Germany.
  6. Łukasz Rawdanowicz, 2012. "Choosing the Pace of Fiscal Consolidation," OECD Economics Department Working Papers 992, OECD Publishing.
  7. 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.

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