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Fiscal Austerity in Emerging Market Economies

Author

Listed:
  • Chetan Dave

    (New York University, Abu Dhabi)

  • Chetan Ghate

    (Indian Statistical Institute, Delhi)

  • Pawan Gopalakrishnan

    (Reserve Bank of India)

  • Suchismita Tarafdar

    (Shiv Nadar University)

Abstract

We build a small open economy RBC model with financial frictions to analyze expansionary fiscal consolidations in emerging market economies (EMEs). We calibrate the model to India, which we view as a proto-typical EME. When factor income tax rates are low, a contractionary fiscal shock has an expansionary effect on output. The economy’s debt/GDP ratio falls, and tax revenues rise. When factor income tax rates are high, a contractionary fiscal shock has an expansionary effect on output if government spending is valued sufficiently highly relative to private consumption by households in utility. We identify the mechanisms behind these results, and their implications for actual economies undertaking fiscal reforms

Suggested Citation

  • Chetan Dave & Chetan Ghate & Pawan Gopalakrishnan & Suchismita Tarafdar, 2018. "Fiscal Austerity in Emerging Market Economies," Discussion Papers 18-05, Indian Statistical Institute, Delhi.
    • Handle: RePEc:alo:isipdp:18-05
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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