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Fiscal Adjustments; Determinants and Macroeconomic Consequences

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  • Alexander Plekhanov
  • Manmohan S. Kumar
  • Daniel Leigh

Abstract

The paper analyzes the determinants of success of recent fiscal consolidations in the OECD countries as well as the short-run and long-run effects of fiscal adjustments on economic activity by looking at fourteen case studies, panel data for OECD countries, and the results of simulations using a non-Ricardian multi-country dynamic general equilibrium model. The study finds that while fiscal consolidations tend to have short-run contractionary effects, they can be expansionary in the long run, provided that they do not rely excessively on cuts in productive government expenditure. They can also create positive spillover effects for the rest of the world.

Suggested Citation

  • Alexander Plekhanov & Manmohan S. Kumar & Daniel Leigh, 2007. "Fiscal Adjustments; Determinants and Macroeconomic Consequences," IMF Working Papers 07/178, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:07/178
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    1. repec:mje:mjejnl:v:13:y:2017:i:3:p:135-148 is not listed on IDEAS
    2. Alberto Alesina & Dorian Carloni & Giampaolo Lecce, 2012. "The Electoral Consequences of Large Fiscal Adjustments," NBER Chapters,in: Fiscal Policy after the Financial Crisis, pages 531-570 National Bureau of Economic Research, Inc.
    3. Sacchi, Agnese & Salotti, Simone, 2015. "The impact of national fiscal rules on the stabilisation function of fiscal policy," European Journal of Political Economy, Elsevier, vol. 37(C), pages 1-20.
    4. Werner Schule, 2010. "The Potential Contribution of Fiscal Policy to Rebalancing and Growth in New Zealand," IMF Working Papers 10/128, International Monetary Fund.
    5. Charles Amo Yartey & Machiko Narita & Garth Peron Nicholls & Joel Chiedu Okwuokei, 2012. "The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean," IMF Working Papers 12/276, International Monetary Fund.
    6. Nicolas Carnot & Francisco de Castro, 2015. "The Discretionary Fiscal Effort: An Assessment of Fiscal Policy and Its Output Effect," Hacienda Pública Española, IEF, vol. 215(4), pages 63-94, December.
    7. Dell' Erba, Salvatore & Mattina, Todd & Roitman, Agustin, 2015. "Pressure or prudence? Tales of market pressure and fiscal adjustment," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 196-213.
    8. Luis-Felipe Zanna & Olivier Basdevant & Susan S. Yang & Genevieve Verdier & Joannes Mongardini & Borislava Mircheva & Dalmacio Benicio, 2011. "The Design of Fiscal Adjustment Strategies in Botswana, Lesotho, Namibia, and Swaziland," IMF Working Papers 11/266, International Monetary Fund.
    9. Olivier Basdevant, 2012. "Fiscal Policies and Rules in the Face of Revenue Volatility within Southern Africa Customs Union Countries (SACU)," IMF Working Papers 12/93, International Monetary Fund.
    10. Sebastian Dellepiane & Niamh Hardiman, 2012. "The New Politics of Austerity: Fiscal Responses to the Economic Crisis in Ireland and Spain," Working Papers 201207, Geary Institute, University College Dublin.
    11. repec:eee:ecosys:v:41:y:2017:i:3:p:367-378 is not listed on IDEAS
    12. International Monetary Fund, 2010. "Post-Crisis Fiscal Policy Priorities for the ASEAN-5," IMF Working Papers 10/252, International Monetary Fund.
    13. repec:mje:mjejnl:v:12:y:2017:i:3:p:135-148 is not listed on IDEAS
    14. Niamh Hardiman, 2013. "Rethinking the political economy of fiscal consolidation in two recessions in Ireland," Working Papers 201316, Geary Institute, University College Dublin.
    15. International Monetary Fund, 2010. "New Zealand; Selected Issues Paper," IMF Staff Country Reports 10/145, International Monetary Fund.
    16. Athanasios Tagkalakis, 2009. "Fiscal adjustments: do labor and product market institutions matter?," Public Choice, Springer, vol. 139(3), pages 389-411, June.
    17. Salvador Barrios & Sven Langedijk & Lucio Pench, 2010. "EU fiscal consolidation after the financial crisis. Lessons from past experiences," European Economy - Economic Papers 2008 - 2015 418, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    18. Sebastian Dellepiane & Niamh Hardiman, 2012. "Fiscal Politics In Time: Pathways to Fiscal Consolidation, 1980-2012," Working Papers 201228, Geary Institute, University College Dublin.
    19. Papageorgiou, Dimitris, 2012. "Fiscal policy reforms in general equilibrium: The case of Greece," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 504-522.

    More about this item

    Keywords

    Adjustment process; Economic models; Fiscal adjustment; Fiscal consolidation; Public debt; Government debt; Fiscal policy; non-Ricardian model; expenditure; fiscal consolidations;

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