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Successful Austerity in the United States, Europe and Japan

Author Info

  • Giovanni Callegari
  • Giovanni Melina
  • Nicoletta Batini

Abstract

The output effects of 2009 fiscal expansions have been hotly debated. But the discussion of fiscal multipliers is even more relevant now that several European countries have had to quickly retract their stimulus measures in an effort to regain market confidence. Using regime-switching VARs we estimate the impact of fiscal adjustment on the United States, Europe and Japan allowing for fiscal multipliers to vary across recessions and booms. We also estimate ex ante probabilities of recessions derived in association with different-sized and different types of consolidation shocks (expenditure- versus tax-based). We use these estimates to understand how consolidations should be designed to be most effective in terms of permanently and rapidly reducing a country’s debt-to-GDP ratio. The main finding is that smooth and gradual consolidations are to be preferred to frontloaded or aggressive consolidations, especially for economies in recession facing high risk premia on public debt, because sheltering growth is key to the success of fiscal consolidation in these cases.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/190.

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Length: 61
Date of creation: 01 Jul 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/190
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Keywords: Fiscal consolidation; Adjustment process; External shocks; Government expenditures; Public debt; Risk management; government spending; fiscal multipliers; fiscal shocks; fiscal policy; fiscal multiplier; fiscal consolidations; government expenditure; fiscal adjustment; fiscal shock; aggregate demand; spending cuts; expenditure cuts; fiscal adjustments; government spending shocks; tax cuts; tax multiplier; taxation; tax revenues; fiscal stimuli; tax rates; fiscal policy adjustment; fiscal variables; fiscal expansion; discretionary fiscal policy; tax policy; fiscal contraction; fiscal expenditure; tax increases; fiscal contractions; fiscal policies; fiscal measure; fiscal retrenchment; government revenue; fiscal stimulus; capital expenditure; tax revenue; increase in government expenditure; fiscal developments; fiscal retrenchments; fiscal expansions; tax burden; tax payments; fiscal spending; tax increase; public expenditure; fiscal component;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Gli effetti recessivi dei tagli alla spesa pubblica
    by keynesblog in Keynes Blog on 2012-08-29 09:21:06
  2. The Strange Case of Dr IMF and Mr Troika
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-08-31 07:46:34
  3. The Strange Case of Dr IMF and Mr Troika
    by Francesco Saraceno in Sparse Thoughts of a Gloomy European Economist on 2012-08-31 07:46:34
  4. Empeñados en una estrategia fiscal estúpida
    by Santiago Lago Peñas in Res Publica on 2012-12-10 21:21:26
  5. Monetary Alchemy, Fiscal Science
    by jfrankel in Jeff Frankels Weblog on 2013-01-26 17:16:19
  6. "L'ACCONCIATURA". E I CONTI (ELETTORALI) CHE NON TORNERANNO
    by Quarantotto in Orizzonte48 on 2014-08-09 15:27:00
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