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Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances

Author

Listed:
  • Bertrand Gruss
  • Jose L. Torres

Abstract

In this paper we use a general equilibrium model with heterogeneous agents to assess the macroeconomic and welfare consequences in the United States of alternative fiscal policies over the medium-term. We find that failing to address the fiscal imbalances associated with current federal fiscal policies for a prolonged period would result in a significant crowding-out of private investment and a severe drag on growth. Compared to adopting a reform that gradually reduces federal debt to its pre-crisis level, postponing debt stabilization for two decades would entail a permanent output loss of about 17 percent and a welfare loss of almost 7 percent of lifetime consumption. Moreover, the long-run welfare gains from the adjustment would more than compensate the initial losses associated with the consolidation period.

Suggested Citation

  • Bertrand Gruss & Jose L. Torres, 2012. "Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances," IMF Working Papers 12/38, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/38
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    References listed on IDEAS

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    1. The cost of US fiscal imbalance
      by Economic Logician in Economic Logic on 2012-03-09 21:48:00

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