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Deficit reduction: Short-term pain for long-term gain

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Listed:
  • Clinton, Kevin
  • Kumhof, Michael
  • Laxton, Douglas
  • Mursula, Susanna

Abstract

The paper evaluates the costs and benefits of fiscal consolidation using simulations based on the IMFs global dynamic general equilibrium model GIMF. Over the longer run, well-targeted permanent reductions in budget deficits can lead to a considerable increase in both the growth rate and the level of output. The gains may be enhanced by shifting some of the tax burden from incomes to consumption. In the short-run, credibility plays a crucial role in determining the size of initial output losses. Global current account imbalances would be significantly reduced if budget consolidation was larger in countries with current account deficits.

Suggested Citation

  • Clinton, Kevin & Kumhof, Michael & Laxton, Douglas & Mursula, Susanna, 2011. "Deficit reduction: Short-term pain for long-term gain," European Economic Review, Elsevier, vol. 55(1), pages 118-139, January.
  • Handle: RePEc:eee:eecrev:v:55:y:2011:i:1:p:118-139
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    References listed on IDEAS

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    Cited by:

    1. Lemoine, Matthieu & Lindé, Jesper, 2016. "Fiscal consolidation under imperfect credibility," European Economic Review, Elsevier, pages 108-141.
    2. repec:oup:oxecpp:v:69:y:2017:i:3:p:632-654. is not listed on IDEAS
    3. Alari PaulusBy & Francesco Figari & Holly Sutherland, 2017. "The design of fiscal consolidation measures in the European Union: distributional effects and implications for macro-economic recovery," Oxford Economic Papers, Oxford University Press, vol. 69(3), pages 632-654.
    4. Vanda Almeida & Gabriela Castro & Ricardo Mourinho Félix & José R. Maria, 2013. "Fiscal Consolidation in a Small Euro-Area Economy," International Journal of Central Banking, International Journal of Central Banking, vol. 9(4), pages 1-38, December.
    5. repec:eee:dyncon:v:83:y:2017:i:c:p:55-106 is not listed on IDEAS
    6. Philippopoulos, Apostolis & Varthalitis, Petros & Vassilatos, Vanghelis, 2017. "Fiscal consolidation and its cross-country effects," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 55-106.
    7. B. Campagne & A. Poissonnier, 2016. "Laffer curves and fiscal multipliers: lessons from Mélèze model," Documents de Travail de la DESE - Working Papers of the DESE g2016-06, Institut National de la Statistique et des Etudes Economiques, DESE.
    8. repec:vrs:tejoae:v:13:y:2016:i:2:p:21-29:n:4 is not listed on IDEAS
    9. Wolters, Maik, 2013. "Möglichkeiten und Grenzen von makroökonomischen Modellen zur (exante) Evaluierung wirtschaftspolitischer Maßnahmen," Working Papers 05/2013, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    10. Tapsoba, Sampawende J.-A., 2014. "Options and strategies for fiscal consolidation in India," Economic Modelling, Elsevier, vol. 43(C), pages 225-237.
    11. Gianluca Cafiso & Roberto Cellini, 2014. "Fiscal consolidations and public debt in Europe," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 614-644, August.
    12. Castro, Gabriela & Maria, José R. & Félix, Ricardo Mourinho & Braz, Cláudia Rodrigues, 2017. "Aging And Fiscal Sustainability In A Small Euro Area Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 21(07), pages 1673-1705, October.
    13. Nicolas End & Sampawende J Tapsoba & G. Terrier & Renaud Duplay, 2015. "Deflation and Public Finances; Evidence from the Historical Records," IMF Working Papers 15/176, International Monetary Fund.
    14. Gianluca Cafiso & Roberto Cellini, 2012. "Evidence on Fiscal Consolidations and the Evolution of Public Debt in Europe," CESifo Working Paper Series 4027, CESifo Group Munich.

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