Fiscal consolidation: Dr Pangloss meets Mr Keynes
A simple dynamic framework is used to show how consolidation plans that are robust and effective at capacity output can be undermined by demand failure. If the market panics and interest rates rise, the process can indeed become dynamically unstable. Tightening fiscal policy to reassure financial markets can lead to a low level “consolidation trap”, however. Better that the Central Bank acts to keep interest rates low; and that fiscal consolidation efforts be state contingent – allowing room for economic stabilisation. The pro-cyclicality of fiscal policy could also be reduced if, as Shiller has argued, debt amortization were state contingent, being indexed to GDP. Debt; Deficits; Fiscal Consolidation; Economic Stabilisation
|Date of creation:||2013|
|Contact details of provider:|| Postal: CV4 7AL COVENTRY|
Phone: +44 (0) 2476 523202
Fax: +44 (0) 2476 523032
Web page: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barr, David & Bush, Oliver & Pienkowski, Alex, 2014. "GDP-linked bonds and sovereign default," Bank of England working papers 484, Bank of England.
- Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2011.
"Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies,"
NBER Working Papers
16782, National Bureau of Economic Research, Inc.
- Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages F4-F30, 02.
- Reinhart, Carmen M. & Rogoff, Kenneth S., 2010.
"Growth in a Time of Debt,"
11129154, Harvard University Department of Economics.
- Dawn Holland & Jonathan Portes, 2012. "Self-Defeating Austerity?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 222(1), pages 4-10, October.
- Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
- Luc Eyraud & Anke Weber, 2013. "The Challenge of Debt Reduction during Fiscal Consolidation," IMF Working Papers 13/67, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:cge:wacage:159. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Snape)
If references are entirely missing, you can add them using this form.