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The Modality of Fiscal Consolidation and Current Account Adjustment

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  • Antonis Adam
  • Thomas Moutos

Abstract

In this article, we argue that supply-side adjustments (i.e. the reallocation of productive resources between the traded and non-traded sectors) can be an important determinant of the output costs of current account adjustment. The argument relies on the fact that tax evasion is more prevalent in the non-traded sector, which is dominated by services and the self-employed. Heavy reliance on tax-based fiscal consolidations induces a reallocation of economic activity towards the non-traded sector, thus requiring a larger decline in domestic absorption (and output) per unit of improvement in the current account balance. Using International Monetary Fund data for the period 1980–2011, we find that budget consolidations that relied more on tax increases than on spending decreases were associated with larger output costs per unit of current account improvement.

Suggested Citation

  • Antonis Adam & Thomas Moutos, 2017. "The Modality of Fiscal Consolidation and Current Account Adjustment," CESifo Economic Studies, CESifo, vol. 63(2), pages 162-181.
  • Handle: RePEc:oup:cesifo:v:63:y:2017:i:2:p:162-181.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifw020
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    Cited by:

    1. Antonis Adam & Panos Hatzipanayotou & Thomas Moutos, 2015. "Labour Market Regulation, Fiscal Consolidation, and the Success of Current Account Adjustments," DEOS Working Papers 1517, Athens University of Economics and Business.
    2. repec:kap:copoec:v:29:y:2018:i:1:d:10.1007_s10602-017-9255-9 is not listed on IDEAS
    3. Antonis Adam & Sofia Tsarsitalidou, 2018. "Do democracies have higher current account deficits?," Constitutional Political Economy, Springer, vol. 29(1), pages 40-68, March.

    More about this item

    Keywords

    current account adjustment; fiscal consolidation; non-traded goods; tax evasion;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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