Assessing the Impact and Phasing of Multi-year Fiscal Adjustment: A General Framework

August 21, 2013

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Ran Bi, Haonan Qu, and James Roaf. Assessing the Impact and Phasing of Multi-year Fiscal Adjustment: A General Framework, (USA: International Monetary Fund, 2013) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper provides a general framework to assess the output and debt dynamics of an economy undertaking multi-year fiscal adjustment. The framework allows country-specific assumptions about the magnitude and persistence of fiscal multipliers, hysteresis effects, and endogenous financing costs. In addition to informing macro projections, the framework can also shed light on the appropriate phasing of fiscal consolidation—in particular, on whether it should be front- or back-loaded. The framework is applied to stylized advanced and emerging economy examples. It suggests that for a highly-indebted economy undertaking large multi-year fiscal consolidation, high multipliers do not always argue against frontloaded adjustment. The case for more gradual or back-loaded adjustment is strongest when hysteresis effects are in play, but it needs to be balanced against implications for debt sustainability. Application to actual country examples tends to cast doubt on claims that very large multipliers have been operating post-crisis. It seems that the GDP forecast errors for Greece may have been due more to over-optimism on potential growth estimates than to underestimating fiscal multipliers.

Subject: Fiscal consolidation, Fiscal multipliers, Fiscal policy, Output gap, Potential output, Production, Public debt

Keywords: Cost feedback loop, Debt dynamics, Debt outcome, Debt restructuring, Debt sustainability, Fiscal consolidation, Fiscal Multiplier, Fiscal multipliers, GDP ratio, Global, Gradual adjustment, Headline debt-GDP effect, Hysteresis Effect, Output gap, Output gap threshold, Phasing of Fiscal Consolidation, Potential output, Private sector, Real GDP, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/182
Stock No:

WPIEA2013182
ISBN:

9781484318669
ISSN:

1018-5941

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