Budget Consolidation: Short-Term Pain and Long-Term Gain

By Douglas Laxton, Susanna Mursula, Kevin Clinton, Michael Kumhof

July 1, 2010

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Douglas Laxton, Susanna Mursula, Kevin Clinton, and Michael Kumhof. Budget Consolidation: Short-Term Pain and Long-Term Gain, (USA: International Monetary Fund, 2010) accessed December 26, 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

The paper evaluates the costs and benefits of fiscal consolidation using simulations based on the IMFs global DSGE model GIMF. Over the longer run, well-targeted permanent reductions in budget deficits lead to a considerable increase in both the growth rate and the level of output. The gains may be enhanced by shifting some of the tax burden from incomes to consumption. In the short run, credibility plays a crucial role in determining the size of initial output loses. Global current account imbalances would be significantly reduced if budget consolidation was larger in countries with current account deficits.

Subject: Consumption, Consumption taxes, Fiscal consolidation, Public debt, Real interest rates

Keywords: Current account, Fiscal policy, Present discounted value, Real interest rate, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/163
Stock No:

WPIEA2010163
ISBN:

9781455201464
ISSN:

1018-5941

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