The Economic Effects of Fiscal Consolidation with Debt Feedback

May 31, 2013

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Marcello M. Estevão, and Issouf Samaké. The Economic Effects of Fiscal Consolidation with Debt Feedback, (USA: International Monetary Fund, 2013) accessed December 25, 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 past several years of recession and slow recovery have raised much interest on the effect of fiscal stimulus on economic activity, even as high public debts in many countries would call for fiscal consolidation. To evaluate the delicate balance between stimulus and consolidation requires measuring the size of fiscal multipliers, which often depends on having quarterly data so that exogenous fiscal policy shocks can be identified. We estimate fiscal multipliers using a novel methodology for identifying fiscal shocks within a structural vector autoregressive approach using annual data while controling for debt feedback effects. The estimation focuses on regions with scarce quarterly data (mostly low-income countries), and uses results for advanced economies, emerging market countries, and other broad groupings for which alternative estimates are available to validate the methodology. Differently from advanced and emerging market economies, fiscal consolidation in low-income countries has only a small temporary negative effect on growth while raising medium-term output. Shifting the composition of public spending toward capital expenditure further supports long-run growth.

Subject: Current spending, Expenditure, Fiscal consolidation, Fiscal multipliers, Fiscal policy, Revenue administration

Keywords: A. fiscal policy, Central America, Consolidation, Counter-cyclical fiscal policy, Current spending, Current spending multiplier, Debt feedback effect, Emerging market country, Fiscal consolidation, Fiscal mulpiliers, Fiscal multipliers, Fiscal policy policy change, Fiscal policy reaction, Fiscal policy shock, Global, Identification, Oil-producer country, Spending cut, Spending multiplier, Sub-Saharan Africa, SVECM, Tax shock, WP

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/136
Stock No:

WPIEA2013136
ISBN:

9781484304488
ISSN:

1018-5941

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