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Debt Hangover in the Aftermath of the Great Recession

Author

Listed:
  • Stephane Auray

    () (CREST-Ensai and Universite du Littoral Cote d'Opale)

  • Aurelien Eyquem

    () (CREST-Ensai, GATE, UMR 5824, Universite de Lyon, and Universite Lumiere Lyon 2)

  • Paul Gomme

    () (Concordia University and CIREQ)

Abstract

Following the Great Recession, U.S. government debt levels exceeded 100% of output. We develop a macroeconomic model to evaluate the role of various shocks during and after the Great Recession; labor market shocks have the greatest impact on macroeconomic activity. We then evaluate the consequences of using alternative fiscal policy instruments to implement a fiscal austerity program to return the debt-output ratio to its pre-Great Recession level. Our welfare analysis reveals that there is not much difference between applying fiscal austerity through government spending, the labor income tax, or the consumption tax; using the capital income tax is welfare-reducing.

Suggested Citation

  • Stephane Auray & Aurelien Eyquem & Paul Gomme, 2017. "Debt Hangover in the Aftermath of the Great Recession," Working Papers 17001, Concordia University, Department of Economics.
  • Handle: RePEc:crd:wpaper:17001
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    File URL: http://paulgomme.github.io/debt-hangover-2017.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:inecon:v:115:y:2018:i:c:p:159-169 is not listed on IDEAS
    2. Auray Stéphane & Eyquem Aurélien, 2017. "Unemployment, Borrowing Constraints and Stabilization Policies," Working Papers 2017-63, Center for Research in Economics and Statistics.
    3. Auray, Stéphane & Eyquem, Aurélien & Gomme, Paul, 2018. "Ramsey-optimal tax reforms and real exchange rate dynamics," Journal of International Economics, Elsevier, vol. 115(C), pages 159-169.

    More about this item

    Keywords

    fiscal policy; fiscal austerity; Great Recession;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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