The macroeconomic effects of the Euro Area's fiscal consolidation

Ansgar Rannenberg, Christian Schoder and Jan Strasky
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Jan Strasky: Organisation for Economic Co-operation and Development

No 10/EL/15, Economic Letters from Central Bank of Ireland

Abstract: This economic letter summarizes research by Rannenberg et al. (2015), who simulate the Euro Area's fiscal consolidation between 2011 and 2013 by employing two DSGE models used by the ECB and the European Commission. The cumulative multiplier over the 2011-2013 period amounts to 0.7 and 1.0 in the baseline, but increases to 1.3 with a reasonably calibrated nancial accelerator and a crisis-related increase of the share of credit constrained households. In the latter scenario, fiscal consolidation would be largely responsible for the further decline in GDP relative to its pre-crisis trend during 2011-2013. Postponing the fiscal consolidation to a period of unconstrained monetary policy (until after the economic recovery) would have avoided most of these losses.

Date: 2015-10
New Economics Papers: this item is included in nep-dge and nep-mac
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