How Much is A Lot? Historical Evidence on the Size of Fiscal Adjustments

By Julio Escolano, Laura Jaramillo, Carlos Mulas-Granados, G. Terrier

September 25, 2014

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Julio Escolano, Laura Jaramillo, Carlos Mulas-Granados, and G. Terrier How Much is A Lot? Historical Evidence on the Size of Fiscal Adjustments, (USA: International Monetary Fund, 2014) accessed December 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

The sizeable fiscal consolidation required to stabilize the debt-to-GDP ratios in several countries in the aftermath of the global crisis raises a crucial question on its feasibility. To answer this question, we rely on historical evidence from a sample of 91 adjustment episodes of countries during 1945–2012 that needed and wanted to adjust in order to stabilize debt to GDP. We find that, in at least half the cases, countries improved their cyclically adjusted primary balances by close to 5 percent of GDP. We also observe that, while countries typically make substantial efforts to stabilize debt, once this objective is achieved, they tend to ease their primary balances and do not necessarily get back to their initial lower debt-to-GDP ratio. We find that consolidations tended to be larger when the initial deficit was high and adjustment efforts were sustained over time. Fiscal adjustments also tended to be larger when accompanied by an easing of monetary conditions and, to a lesser extent, by an improvement in credit conditions.

Subject: Exchange rates, Financial services, Fiscal consolidation, Fiscal policy, Fiscal stance, Foreign exchange, Public debt, Short term interest rates

Keywords: CAPB change, CAPB level, Debt, Debt need, Debt ratio, Deficit, Developing country episode, Exchange rates, Financial crisis, Fiscal consolidation, Fiscal policy, Fiscal stance, Fiscal sustainability, GDP growth rate, Global, Interest rate, Percent of GDP, Primary balance, Private sector, Short term interest rates, Size of adjustment, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/179
Stock No:

WPIEA2014179
ISBN:

9781484378861
ISSN:

1018-5941

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