The Modality of Fiscal Consolidation and Current Account Adjustment

Arbeitspapier

In this paper we argue that supply-side adjustments (i.e. the reallocation of productive resources between the traded and non-traded sectors) can be an important determinant of the output costs of current account adjustment. The argument relies on the fact that tax evasion is more prevalent in the non-traded sector, which is dominated by services and the self-employed. Heavy reliance on tax-based fiscal consolidations induces a reallocation of economic activity towards the non-traded sector, thus requiring a larger decline in domestic absorption (and output) per unit of improvement in the current account balance. Using IMF data for the period 1980-2011 we find that budget consolidations which rely more on tax increases than on spending decreases will be associated with larger output costs per unit of current account improvement.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 5451

Classification and Topics

• Classification: Wirtschaft ; Fiscal Policy ; Current Account Adjustment; Short-term Capital Movements ; Open Economy Macroeconomics
• Subject: current account adjustment ; fiscal consolidation ; sacrifice ratio ; tax evasion

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adam, Antonis ; Moutos, Thomas
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/113787
• Last update: 10.03.2025, 11:42 AM CET