The Composition of Fiscal Consolidation Matters: Policy Simulations for Hungary

October 4, 2013

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Format: Chicago

Alejandro D Guerson. The Composition of Fiscal Consolidation Matters: Policy Simulations for Hungary, (USA: International Monetary Fund, 2013) accessed November 12, 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 evaluates policy alternatives to achieve permanent fiscal consolidation in Hungary, based on a general equilibrium calibration. The main finding is that the composition of the consolidation, as determined by the mix of revenue and expenditure measures, has important implications for growth, employment, investment, and other key macroeconomic variables. A reduction in current expenditures yields the smallest GDP contraction in the short term and can increase output in the long term by stimulating labor participation and private investment. On the other end of the spectrum, a consolidation of government investment and corporate taxes are the most costly, as disincentives for private investment result in protracted declines in GDP that compound over time to GDP losses that are multiple times the initial size of the consolidation.

Subject: Consumption, Fiscal consolidation, Fiscal policy, Government consumption, Labor, National accounts, Public debt

Keywords: Adjustment cost, Consumption, DSGE models, Expenditure category, Financial accelerator, Fiscal consolidation, GDP, Global, Goods, Goods producer, Government consumption, Hungary, Import agent, Inertial consumption dynamics, Investment, Investment goods output, Liquidity constrained households, Macro-financial linkages, Output, Overlapping generations households, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/207
Stock No:

WPIEA2013207
ISBN:

9781484305225
ISSN:

1018-5941

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