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Fiscal Consolidation Contrasting Strategies & Lessons from International Experience

  • Joerg Bibow

    (University of Hamburg & The Levy Economics Institute)

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    Contrasting Strategies & Lessons From International Experiences Jörg Bibow* Abstract: This paper analyzes the issues of public finance sustainability and suitability of strategies aimed at fiscal consolidation. Contrasting growth-based versus thrift-based consolidation strategies, it is argued that in the light of theory only the former promises success in large economies. Empirically, this study investigates the experiences with consolidation over the 1990s in the U.S., Japan, and the eurozone while scrutinizing disparities in economic performance and consolidation within Europe. It is argued that experiences of individual European Union (EU) member states may not be applicable to the eurozone as a whole and that the U.S. may provide the only relevant example for guiding policymaking in the EMU. The U.S. example features cooperative macroeconomic policies geared at steering domestic demand growth, with sustainable public finances as a consequence of their success. By contrast, the Maastricht regime features a counterproductive mix of thrift-based consolidation and inflation-obsessed monetary policyCultimately a recipe for disaster. Reforms should focus on securing cooperation and proper growth orientation in macroeconomic policymaking, with discipline being imposed in a more balanced way on both finance ministers and central bankers.

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    Paper provided by EconWPA in its series Macroeconomics with number 0402014.

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    Length: 53 pages
    Date of creation: 06 Feb 2004
    Date of revision:
    Handle: RePEc:wpa:wuwpma:0402014
    Note: Type of Document - pdf; pages: 53
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