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Fiscal consolidation in times of crisis: is the sooner really the better?

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  • Christophe Blot

    (Observatoire français des conjonctures économiques)

  • Marion Cochard
  • Jérôme Creel

    (Observatoire français des conjonctures économiques)

  • Bruno Ducoudre

    (Observatoire français des conjonctures économiques)

  • Danielle Schweisguth

    (Observatoire français des conjonctures économiques)

  • Xavier Timbeau

    (Observatoire français des conjonctures économiques)

Abstract

Recent evidence has renewed views on the size of fiscal multipliers. It is notably emphasized that fiscal multipliers are higher in times of crisis. Starting from this literature, we develop a simple and tractable model to deal with the fiscal strategy led by euro area countries. Constrained by fiscal rules and by speculative attacks in financial markets, euro area members have adopted restrictive fiscal policies despite strong negative output gaps. Based on the model, we present simulations to determine the path of public debt given the current expected consolidation. Our simulations suggest that despite strong austerity measures, not all countries would be able to reach the 60% debt-to-GDP. If fiscal multipliers vary along the business cycle, this would give a strong case for delaying austerity. This alternative scenario is considered. Our results show not only that delaying austerity would improve growth perspectives and would not be incompatible with public debt converging to 60% of GDP.

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  • Christophe Blot & Marion Cochard & Jérôme Creel & Bruno Ducoudre & Danielle Schweisguth & Xavier Timbeau, 2014. "Fiscal consolidation in times of crisis: is the sooner really the better?," Sciences Po publications info:hdl:2441/2g7mhju69b9, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/2g7mhju69b94obeaqlen09s1au
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    Cited by:

    1. Uxó González, Jorge & Álvarez, Ignacio & Febrero, Eladio, 2017. "Fiscal space on the eurozone periphery: The case of Spain," IPE Working Papers 84/2017, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    2. Christophe Blot & Jérôme Creel & Bruno Ducoudre & Xavier Timbeau, 2015. "Back to fiscal consolidation in Europe and its dual tradeoff : now or later, through spending cuts or tax hikes ?," Sciences Po publications 2015-11, Sciences Po.
    3. Christophe Blot & Marion Cochard & Jérôme Creel & Bruno Ducoudré & Danielle Schweisguth & Xavier Timbeau, 2014. "Fiscal Consolidation, Public Debt and Output Dynamics in the Euro Area: lessons from a simple model with time-varying fiscal multipliers," Revue d'économie politique, Dalloz, vol. 124(6), pages 953-989.
    4. Karim Triki, 2016. "Expenditure-based Consolidation: Experiences and Outcomes – Workshop proceedings," European Economy - Discussion Papers 2015 - 026, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    5. Céline Antonin & Christophe Blot & Amel Falah & Sabine Le Bayon & Hervé Péléraux & Christophe Blot & Christine Rifflart & Xavier Timbeau & Sabine Le Bayon & Catherine Mathieu & Mathieu Plane & Christi, 2014. "Le piège de la déflation: Perspectives économiques 2014-2015 pour l'économie mondiale," Sciences Po publications info:hdl:2441/3rkj9m8cf38, Sciences Po.
    6. Céline Antonin & Christophe Blot & Amel Falah & Sabine Le Bayon & Hervé Péléraux & Christine Rifflart & Xavier Timbeau & Catherine Mathieu & Mathieu Plane, 2014. "Le piège de la déflation," Post-Print hal-01093020, HAL.

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    Keywords

    public debt; fiscal multipliers; debt;

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