Fiscal Policy: Lessons from the Global Crisis
The global crisis interacted heavily with fiscal policy in the run-up to the crisis, during the crisis and now in the recovery phase. Contrary to the general consensus, the paper argues that in the run-up to the crisis, fiscal policy in the advanced economies and China substantially contributed to the propagation of the global imbalances, while at the same time it reduced the fiscal space that was available to the advanced countries when the crisis occurred. On the policy response during the crisis, the paper suggests that the discretionary relaxation was a mixed blessing at best: appropriate to some extent in countries that entered the crisis with solid fiscal and current account positions, but much less, if at all, in other countries, particularly those that faced problems of public debt sustainability. Even letting the automatic stabilizers operate fully was not an option for countries in a weak fiscal position, particularly in light of the substantial downward revisions in the potential GDP level and growth rates. Looking ahead, the large deterioration in the public debt ratios resulting from the crisis will slow down output growth in the advanced economies, while also requiring painful fiscal adjustment. Emerging market economies, in general, did better in the crisis than the advanced economies, but in most of the post-transition European economies, the effects of the crisis were amplified by the pronounced external imbalances at the outset of the crisis. A majority of European post-transition countries will, therefore, also face substantial fiscal challenges in the period ahead.
Volume (Year): 13 (2011)
Issue (Month): 1 (April)
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References listed on IDEAS
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- Carmen M. Reinhart & Kenneth S. Rogoff, 2010.
"Growth in a Time of Debt,"
American Economic Review,
American Economic Association, vol. 100(2), pages 573-578, May.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," NBER Working Papers 15639, National Bureau of Economic Research, Inc.
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- Reinhart, Carmen M. & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers 7661, C.E.P.R. Discussion Papers.
- Vincent Koen & Paul van den Noord, 2005. "Fiscal Gimmickry in Europe: One-Off Measures and Creative Accounting," OECD Economics Department Working Papers 417, OECD Publishing.
- Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
- Andrea Schaechter & Carlo Cottarelli, 2010. "Long-Term Trends in Public Finances in the G-7 Economies," IMF Staff Position Notes 2010/13, International Monetary Fund.
- Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2010. "The future of public debt: prospects and implications," BIS Working Papers 300, Bank for International Settlements. Full references (including those not matched with items on IDEAS)
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