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Fiscal Consolidation in Israel: A Global Fiscal Model Perspective

  • Selim Elekdag
  • Natan Epstein
  • Marialuz Moreno-Badía

Fiscal consolidation has become a central policy prescription for many highly indebted emerging market countries (EMCs). Although prudent fiscal policies tend to reduce vulnerabilities, their implementation is usually postponed. This paper is one of the first attempts in the literature to quantify the costs of delaying fiscal consolidation in an EMC. Using the International Monetary Fund's Global Fiscal Model, we find that early consolidation through expenditure cuts results in a substantial increase in Israel's long-term output growth over delayed fiscal adjustment. Moreover, the more flexible are the factor markets, the larger is this output gain.

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Article provided by M.E. Sharpe, Inc. in its journal Emerging Markets Finance and Trade.

Volume (Year): 43 (2007)
Issue (Month): 6 (November)
Pages: 67-86

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Handle: RePEc:mes:emfitr:v:43:y:2007:i:6:p:67-86
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  1. Perotti, Roberto, 1998. " The Political Economy of Fiscal Consolidations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 367-94, March.
  2. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  3. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
  4. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  5. International Monetary Fund, 2004. "Israel; Report on Observance of Standards and Codes-Fiscal Transparency Module," IMF Staff Country Reports 04/112, International Monetary Fund.
  6. Dirk Muir & Douglas Laxton & Dennis P. J. Botman & Andrei Romanov, 2006. "A New-Open-Economy Macro Model for Fiscal Policy Evaluation," IMF Working Papers 06/45, International Monetary Fund.
  7. Douglas Laxton & Susanna Mursula & Michael Kumhof & Dirk Muir, 2010. "The Global Integrated Monetary and Fiscal Model (GIMF); Theoretical Structure," IMF Working Papers 10/34, International Monetary Fund.
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