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Global Fiscal Consolidation

Author

Listed:
  • Warwick J. McKibbin

    () (Research School of Economics, Australian National University, ANU College of Business and Economics, and The Brookings Institution)

  • Andrew B. Stoeckel

    () (Centre for Applied Macroeconomic Analysis, Australian National University, ANU College of Business and Economics)

Abstract

The buildup in government debt in response to the “great recession,” has raised a number of policy dilemmas for individual countries as well as the world as a whole. The recent need for a change of fiscal policy stance has fuelled debates about the impact of fiscal consolidation on domestic economies that are tightening, the flow-on effects to the world economy, and also about how much tightening there should be and how quickly it should happen. This paper explores these issues in a global framework focusing on the national and global consequences of coordinated fiscal consolidation. It explores the implications this fiscal adjustment might have on country risk premia and what happens if all countries coordinate their fiscal adjustment except the United States. A coordinated fiscal consolidation in the industrial world that is not accompanied by U.S. actions is likely to lead to a substantial worsening of trade imbalances globally as the release of capital in fiscally contracting economies flows into the U.S. economy, appreciates the U.S. dollar, and worsens the current account position of the United States. The scale of this change is likely to be sufficient to substantially increase the probability of a trade war between the United States and other economies. To avoid this outcome, a coordinated fiscal adjustment is clearly in the interest of the global economy. © 2012 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

Suggested Citation

  • Warwick J. McKibbin & Andrew B. Stoeckel, 2012. "Global Fiscal Consolidation," Asian Economic Papers, MIT Press, vol. 11(1), pages 124-146, Winter/Sp.
  • Handle: RePEc:tpr:asiaec:v:11:y:2012:i:1:p:124-146
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    References listed on IDEAS

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    Cited by:

    1. Rod Tyers, 2016. "China and Global Macroeconomic Interdependence," The World Economy, Wiley Blackwell, vol. 39(11), pages 1674-1702, November.
    2. Paul De Grauwe & Zhaoyong Zhang & Rod Tyers, 2016. "Slower Growth and Vulnerability to Recession: Updating China's Global Impact," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(1), pages 66-88, February.
    3. Rod Tyers, 2014. "Pessimism Shocks in a Model of Global Macroeconomic Interdependence," Economics Discussion / Working Papers 14-28, The University of Western Australia, Department of Economics.
    4. Rod Tyers, 2013. "A Simple Model to Study Global Macroeconomic Interdependence," Economics Discussion / Working Papers 13-23, The University of Western Australia, Department of Economics.
    5. McKibbin, Warwick J. & Wilcoxen, Peter J., 2013. "A Global Approach to Energy and the Environment," Handbook of Computable General Equilibrium Modeling, Elsevier.

    More about this item

    Keywords

    Global Financial Crisis; Fiscal Policy; DSGE models;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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