Arbeitspapier

Fiscal consolidation strategy

In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact focussing primarily on a dynamic stochastic general equilibrium model with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. We explore the role of the mix of expenditure cuts and tax reductions as well as gradualism in achieving this policy outcome. Finally, we conduct sensitivity studies regarding the type of model used and its parameterization.

Language: Englisch

Bibliographic citation: Series: CFS Working Paper ; No. 2012/12

Classification: Wirtschaft
Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications
Fiscal Policy
National Deficit; Surplus
National Debt; Debt Management; Sovereign Debt
Forecasts of Budgets, Deficits, and Debt

Subject: Fiscal Policy
Fiscal Consolidation
Government Debt
Government Deficit
DSGE Model
Öffentliche Finanzwirtschaft
Öffentliche Schulden
Finanzpolitik
Haushaltskonsolidierung
Theorie

Event: Geistige Schöpfung

(who): Cogan, John F.
Taylor, John B.
Wieland, Volker
Wolters, Maik H.

Event: Veröffentlichung

(who): Goethe University Frankfurt, Center for Financial Studies (CFS)

(where): Frankfurt a. M.

(when): 2012

Handle: http://hdl.handle.net/10419/71146

URN: urn:nbn:de:hebis:30:3-272516

Last update: 10.03.2025, 11:44 AM CET

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Object type

Arbeitspapier

Associated

Cogan, John F.
Taylor, John B.
Wieland, Volker
Wolters, Maik H.
Goethe University Frankfurt, Center for Financial Studies (CFS)

Time of origin

2012

Other Objects (12)

Arbeitspapier