Fiscal Austerity Measures: Spending Cuts vs. Tax Increases
We formulate an overlapping generations model with skill heterogeneity and productive and non-productive government programs to study the macroeconomic and intergenerational welfare effects caused by risk premium shocks and government debt reductions. We demonstrate that in a small open economy with a high level of debt-to-GDP ratio a small increase in the risk premium leads to substantial output contraction and negative welfare effects. Next, we quantify the effects of reducing the debt-to-GDP ratio using a wide range of fiscal austerity measures. These reforms result in trade-offs between short-run contractions and long-run expansions in aggregate output. In addition, the spending-based austerity reform is dominated by the tax-based reform in terms of income in the short run, but becomes dominant in the long run. The welfare effects vary significantly across generations, depending on fiscal austerity measures, skills and working sector. The current old and middle age generations experience welfare losses while current young workers and future generations are beneficiaries of the reforms. A mixed reform results in the largest welfare effects.
|Date of creation:||Jan 2013|
|Date of revision:||Aug 2013|
|Contact details of provider:|| Postal: Towson, Maryland 21252-0001|
Web page: http://www.towson.edu/cbe/departments/economics/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Huixin Bi & Eric M. Leeper & Campbell B. Leith, 2012.
"Uncertain Fiscal Consolidations,"
NBER Working Papers
17844, National Bureau of Economic Research, Inc.
- Huixin Bi & Eric M. Leeper & Campbell Leith, 2013. "Uncertain Fiscal Consolidations," Staff Working Papers 13-26, Bank of Canada.
- Bi, Huixin & Leeper, Eric M. & Leith, Campbell, 2012. "Uncertain Fiscal Consolidations," SIRE Discussion Papers 2012-09, Scottish Institute for Research in Economics (SIRE).
- Huixin Bi & Eric M. Leeper & Campbell Leith, 2012. "Uncertain Fiscal Consolidations," Working Papers 2012_03, Business School - Economics, University of Glasgow.
- repec:hrv:faseco:2580047 is not listed on IDEAS
- Huixin Bi & Eric M. Leeper, 2013. "Analyzing Fiscal Sustainability," Staff Working Papers 13-27, Bank of Canada.
- Arghyrou, Michael G & Tsoukalas, John D., 2010.
"The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes,"
Cardiff Economics Working Papers
E2010/3, Cardiff University, Cardiff Business School, Economics Section.
- Michael G. Arghyrou & John D. Tsoukalas, 2011. "The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes," The World Economy, Wiley Blackwell, vol. 34(2), pages 173-191, 02.
- Michael G. Arghyrou & John D. Tsoukalas, 2010. "The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes," CESifo Working Paper Series 3266, CESifo Group Munich.
- Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2004.
"Sovereign risk premia in the European government bond market,"
ZEI Working Papers
B 26-2003, University of Bonn, ZEI - Center for European Integration Studies.
- Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2004. "Sovereign risk premia in the European government bond market," Working Paper Series 0369, European Central Bank.
- Owen O'Donnell & Platon Tinios, 2003. "The Politics of Pension Reform: Lessons from Public Attitudes in Greece," Political Studies, Political Studies Association, vol. 51(2), pages 262-281, 06.
- Ardagna, Silvia, 2004. "Fiscal stabilizations: When do they work and why," European Economic Review, Elsevier, vol. 48(5), pages 1047-1074, October.
- Barro, Robert J, 1979.
"On the Determination of the Public Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 87(5), pages 940-71, October.
- Real Arai, 2011.
"Productive Government Expenditure and Fiscal Sustainability,"
FinanzArchiv: Public Finance Analysis,
Mohr Siebeck, Tübingen, vol. 67(4), pages 327-351, December.
- Arai, Real, 2008. "Productive government expenditure and fiscal sustainability," MPRA Paper 8553, University Library of Munich, Germany.
- Ireland, Peter N., 1994. "Supply-side economics and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 559-571, June.
- Juergen Jung & Chung Tran, 2014.
"Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010,"
2014-01, Towson University, Department of Economics, revised Jan 2016.
- Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
- Juergen Jung & Chung Tran, 2011. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Working Papers 201102, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
- Juergen Jung & Chung Tran, 2010. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Discussion Papers 2010-31, School of Economics, The University of New South Wales.
- Chung Tran & Juergen Jung, 2011. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," ANU Working Papers in Economics and Econometrics 2011-539, Australian National University, College of Business and Economics, School of Economics.
- Forni, Lorenzo & Gerali, Andrea & Pisani, Massimiliano, 2010. "The macroeconomics of fiscal consolidations in euro area countries," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1791-1812, September.
- 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.
- Tsakloglou, Panos & Cholezas, Ioannis, 2005. "Education and Inequality in Greece," IZA Discussion Papers 1582, Institute for the Study of Labor (IZA).
- Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 83-114, June.
- Lucas, Robert Jr. & Stokey, Nancy L., 1983.
"Optimal fiscal and monetary policy in an economy without capital,"
Journal of Monetary Economics,
Elsevier, vol. 12(1), pages 55-93.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Jesper Linde, 2012.
"Fiscal Consolidation in an Open Economy,"
2012 Meeting Papers
1087, Society for Economic Dynamics.
- Erceg, Christopher & Lindé, Jesper, 2012. "Fiscal Consolidation in an Open Economy," CEPR Discussion Papers 8955, C.E.P.R. Discussion Papers.
- Christopher J. Erceg & Jesper Lindé, 2012. "Fiscal consolidation in an open economy," International Finance Discussion Papers 1046, Board of Governors of the Federal Reserve System (U.S.).
- Charles R. Hulten, 1996. "Infrastructure Capital and Economic Growth: How Well You Use It May Be More Important Than How Much You Have," NBER Working Papers 5847, National Bureau of Economic Research, Inc.
- Barro, R.J., 1988.
"Government Spending In A Simple Model Of Endogenous Growth,"
RCER Working Papers
130, University of Rochester - Center for Economic Research (RCER).
- Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
- Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
- Laitner, John, 1984. "Transition time paths for overlapping-generations models," Journal of Economic Dynamics and Control, Elsevier, vol. 7(2), pages 111-129, May.
- Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
- Laurence J. Kotlikoff & Kent Smetters & Jan Walliser, 2001. "Finding a Way Out of America's Demographic Dilemma," NBER Working Papers 8258, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:tow:wpaper:2013-01. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Juergen Jung)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.