Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances

January 1, 2012

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Bertrand Gruss, and Jose L. Torres Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances, (USA: International Monetary Fund, 2012) 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

In this paper we use a general equilibrium model with heterogeneous agents to assess the macroeconomic and welfare consequences in the United States of alternative fiscal policies over the medium-term. We find that failing to address the fiscal imbalances associated with current federal fiscal policies for a prolonged period would result in a significant crowding-out of private investment and a severe drag on growth. Compared to adopting a reform that gradually reduces federal debt to its pre-crisis level, postponing debt stabilization for two decades would entail a permanent output loss of about 17 percent and a welfare loss of almost 7 percent of lifetime consumption. Moreover, the long-run welfare gains from the adjustment would more than compensate the initial losses associated with the consolidation period.

Subject: Consumption, Fiscal consolidation, Fiscal policy, Labor, National accounts, Public debt, Self-employment

Keywords: Accounting exercise, Capital income share, Capital stock, Closed economy, Consumption, Crisis in Europe, Crowding out, Debt accounting exercise, Debt crisis in Europe, Debt ratio, Equilibrium interest rate, Europe, Fiscal consolidation, Fiscal imbalances, GDP contract, GDP increase, Government debt, Growth, Growth rate, Interest rate, Labor income tax rate, Self-employment, Welfare, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/038
Stock No:

WPIEA2012038
ISBN:

9781463933814
ISSN:

1018-5941

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