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 
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. 
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Metadaten
Author:John F. Cogan, John B. Taylor, Volker Wieland, Maik H. Wolters
URN:urn:nbn:de:hebis:30:3-272516
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2012,12
Series (Serial Number):CFS working paper series (2012, 12)
Publisher:CFS
Place of publication:Frankfurt, Main
Document Type:Working Paper
Language:English
Year of Completion:2012
Year of first Publication:2012
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2012/10/18
Tag:DSGE Model; Fiscal Consolidation; Fiscal Policy; Government Debt; Government Deficit
Issue:September 21, 2012
Pagenumber:35
HeBIS PPN:348140037
Institutes:Wirtschaftswissenschaften
Institute for Monetary and Financial Stability (IMFS)
Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:E27 Forecasting and Simulation
E62 Fiscal Policy
H62 Deficit; Surplus
H63 Debt; Debt Management
H68 Forecasts of Budgets, Deficits, and Debt
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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