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The impact of fiscal consolidation on economic growth. An illustration for the Spanish economy based on a general equilibrium model

Author

Listed:
  • Pablo Hernández de Cos

    () (Banco de España)

  • Carlos Thomas

    () (Banco de España)

Abstract

This study illustrates the effects of different fiscal consolidation measures on economic activity through simulations performed with a general equilibrium model calibrated to the Spanish economy. Overall, our results show that fiscal consolidation has short-run costs but sizable long-run benefits in terms of growth. Regarding the short-run costs, their magnitude depends crucially on the presence of confidence effects due to the consolidation process, which tend to reduce the value of fiscal multipliers

Suggested Citation

  • Pablo Hernández de Cos & Carlos Thomas, 2012. "The impact of fiscal consolidation on economic growth. An illustration for the Spanish economy based on a general equilibrium model," Occasional Papers 1205, Banco de España;Occasional Papers Homepage.
  • Handle: RePEc:bde:opaper:1205
    as

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosOcasionales/12/Fich/do1205.pdf
    File Function: First version, May 2012
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    References listed on IDEAS

    as
    1. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, pages 575-593.
    2. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, pages 323-351.
    3. Howitt, Peter & Mayer-Foulkes, David, 2005. "R&D, Implementation, and Stagnation: A Schumpeterian Theory of Convergence Clubs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(1), pages 147-177, February.
    4. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, pages 71-102.
    5. Rossana Merola & Douglas Sutherland, 2012. "Fiscal Consolidation: Part 3. Long-Run Projections and Fiscal Gap Calculations," OECD Economics Department Working Papers 934, OECD Publishing.
    6. Peter Howitt, 2000. "Endogenous Growth and Cross-Country Income Differences," American Economic Review, American Economic Association, pages 829-846.
    7. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
    8. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, pages 575-593.
    9. Sarai Criado & Adrian van Rixtel, 2008. "Structured finance and the financial turmoil of 2007-2008: and introductory overview," Occasional Papers 0808, Banco de España;Occasional Papers Homepage.
    10. Duval, Romain & de la Maisonneuve, Christine, 2010. "Long-run growth scenarios for the world economy," Journal of Policy Modeling, Elsevier, pages 64-80.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Thomas Warmedinger & Cristina Checherita-Westphal & Pablo Hernández de Cos, 2015. "Fiscal Multipliers and Beyond," Hacienda Pública Española, IEF, pages 139-168.
    2. repec:ecb:ecbops:2011162 is not listed on IDEAS

    More about this item

    Keywords

    Fiscal consolidation; general equilibrium; fiscal multipliers; confidence effects;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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