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Fiscal consolidation in times of crisis: is the sooner really the better?

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  • Christophe Blot

    (OFCE)

  • Marion Cochard

    (OFCE)

  • Jérôme Creel

    (OFCE)

  • Bruno Ducoudre

    (OFCE)

  • Danielle Schweisguth

    (OFCE)

  • Xavier Timbeau

    (OFCE)

Abstract

Recent evidence has renewed views on the size of fiscal multipliers. It is notably emphasized that fiscal multipliers are higher in times of crisis. Starting from this literature, we develop a simple and tractable model to deal with the fiscal strategy led by euro area countries. Constrained by fiscal rules and by speculative attacks in financial markets, euro area members have adopted restrictive fiscal policies despite strong negative output gaps. Based on the model, we present simulations to determine the path of public debt given the current expected consolidation. Our simulations suggest that despite strong austerity measures, not all countries would be able to reach the 60% debt-to-GDP. If fiscal multipliers vary along the business cycle, this would give a strong case for delaying austerity. This alternative scenario is considered. Our results show not only that delaying austerity would improve growth perspectives and would not be incompatible with public debt converging to 60% of GDP.

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Bibliographic Info

Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/2g7mhju69b94obeaqlen09s1au.

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Date of creation: Apr 2014
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Publication status: Published in Revue de l'OFCE - Débats et politiques, 2014, pp.159-192
Handle: RePEc:spo:wpmain:info:hdl:2441/2g7mhju69b94obeaqlen09s1au

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Keywords: public debt; fiscal multipliers; debt;

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