When fiscal consolidation meets private deleveraging

Javier Andrés (), Oscar Arce () and Carlos Thomas

No 1622, Working Papers from Banco de España

Abstract: We analyze the interaction between fiscal consolidation and private-sector deleveraging in an economy within a monetary union. Pre-existing long term collateralized private debt – a core ingredient of the deleveraging process – plays a critical role in shaping fiscal multipliers. By buffering the short-run fall in debtors’ spending capacity, long-run private debt reduces the short-run multipliers of aggressive (large and/or fast) consolidations. However, absent credibility concerns, aggressive consolidations raise the intensity and length of private deleveraging, causing higher output losses over the medium run. In terms of discounted output losses and welfare, this latter effect dominates, so that larger and faster consolidations are relatively costlier than smaller and more gradual ones. Also, in this environment, alternative budgetary instruments generate sizable differences in terms of their incidence on private deleveraging dynamics and, hence, on the overall output costs of fi scal consolidations.

Keywords: fiscal consolidations; long term private debt; financial shock. (search for similar items in EconPapers)
JEL-codes: E44 E62 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2016-10
New Economics Papers: this item is included in nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: When Fiscal Consolidation Meets Private Deleveraging (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1622

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