Fiscal multipliers and beyond

Bericht

This paper seeks to link the debate surrounding short-term fiscal multipliers with the medium and longer-term impact of fiscal consolidation on public debt sustainability. A literature review and empirical findings for state-dependent multipliers confirm that there is considerable uncertainty surrounding the size of the short-term multiplier. Notably, multipliers may be larger in deep recessions or financial crises, but the negative impact of fiscal consolidation is mitigated when public finances are weak. Using a stylised framework and a range of plausible values for the fiscal multiplier, simulations suggest that an increase in the debt ratio following episodes of fiscal consolidation is likely to be short-lived. Even in a macroeconomic context in which multipliers are high, a front-loaded fiscal consolidation reduces the total consolidation effort and implies a faster stabilisation of the debt ratio. In general, back-loading is subject to higher implementation risks, most notably in the light of political economy considerations. Overall, when determining the fiscal adjustment path, both the short-term costs and the longer-term benefits need to be taken into account. Particular attention should be paid to the composition of consolidation packages, with well-designed adjustments likely to imply a faster stabilisation of the debt ratio.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Occasional Paper ; No. 162

Classification and Topics

• Classification: Wirtschaft ; Fiscal Policies and Behavior of Economic Agents: General
• Subject: fiscal policies ; Government debt ; Macroeconomic Aspects of Public Finance ; Sustainability

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Warmedinger, Thomas ; Checherita-Westphal, Cristina ; Hernández de Cos, Pablo
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/154615
• Last update: 10.03.2025, 11:44 AM CET