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

Listed author(s):
  • Christophe Blot
  • Marion Cochard
  • Jérôme Creel
  • Bruno Ducoudré
  • Danielle Schweisguth
  • Xavier Timbeau

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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Article provided by Presses de Sciences-Po in its journal Revue de l'OFCE.

Volume (Year): N° 132 (2014)
Issue (Month): 1 ()
Pages: 159-192

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Handle: RePEc:cai:reofsp:reof_132_0159
Contact details of provider: Web page: http://www.cairn.info/revue-de-l-ofce.htm

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