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Assessing the Impact and Phasing of Multi-year Fiscal Adjustment; A General Framework

  • Ran Bi
  • Haonan Qu
  • James Roaf
Registered author(s):

    This paper provides a general framework to assess the output and debt dynamics of an economy undertaking multi-year fiscal adjustment. The framework allows country-specific assumptions about the magnitude and persistence of fiscal multipliers, hysteresis effects, and endogenous financing costs. In addition to informing macro projections, the framework can also shed light on the appropriate phasing of fiscal consolidation—in particular, on whether it should be front- or back-loaded. The framework is applied to stylized advanced and emerging economy examples. It suggests that for a highly-indebted economy undertaking large multi-year fiscal consolidation, high multipliers do not always argue against frontloaded adjustment. The case for more gradual or back-loaded adjustment is strongest when hysteresis effects are in play, but it needs to be balanced against implications for debt sustainability. Application to actual country examples tends to cast doubt on claims that very large multipliers have been operating post-crisis. It seems that the GDP forecast errors for Greece may have been due more to over-optimism on potential growth estimates than to underestimating fiscal multipliers.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/182.

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    Length: 31
    Date of creation: 21 Aug 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/182
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    1. Miguel Almunia & Agustín S. Bénétrix & Barry Eichengreen & Kevin H. O'Rourke & Gisela Rua, 2009. "From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons," The Institute for International Integration Studies Discussion Paper Series iiisdp303, IIIS.
    2. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
    3. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," NBER Working Papers 18779, National Bureau of Economic Research, Inc.
    4. repec:imf:imfwpa:12/286 is not listed on IDEAS
    5. repec:imf:imfwpa:11/52 is not listed on IDEAS
    6. repec:imf:imfwpa:12/190 is not listed on IDEAS
    7. Michael Woodford, 2010. "Simple Analytics of the Government Expenditure Multiplier," NBER Working Papers 15714, National Bureau of Economic Research, Inc.
    8. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98 National Bureau of Economic Research, Inc.
    9. J. Bradford DeLong & Lawrence H. Summers, 2012. "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 233-297.
    10. Alan J. Auerbach & Yuriy Gorodnichenko, 2010. "Measuring the Output Responses to Fiscal Policy," NBER Working Papers 16311, National Bureau of Economic Research, Inc.
    11. Yakita, Akira, 2008. "Sustainability of public debt, public capital formation, and endogenous growth in an overlapping generations setting," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 897-914, April.
    12. Pier Carlo Padoan & Urban Sila & Paul van den Noord, 2012. "Avoiding debt traps: Fiscal consolidation, financial backstops and structural reforms," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 151-177.
    13. repec:imf:imfwpa:13/1 is not listed on IDEAS
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