Fiscal Multipliers and Beyond

Thomas Warmedinger (), Cristina Checherita-Westphal () and Pablo Hernández de Cos
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Thomas Warmedinger: European Central Bank
Cristina Checherita-Westphal: European Central Bank
Authors registered in the RePEc Author Service: Cristina Checherita Westphal

Hacienda Pública Española / Review of Public Economics, 2015, vol. 215, issue 4, 139-168

Abstract: This paper seeks to link the debate surrounding short-term fiscal multipliers with the medium and longer-term impact of fiscal consolidation on public debt sustainability. A literature review and empirical findings for state-dependent multipliers confirm that there is considerable uncertainty surrounding the size of the short-term multiplier. Notably, multipliers may be larger in deep recessions or financial crises, but the negative impact of fiscal consolidation is mitigated when public finances are weak. Using a stylised framework and a range of plausible values for the fiscal multiplier, simulations suggest that an increase in the debt ratio following episodes of fiscal consolidation is likely to be short-lived. Even in a macroeconomic context in which multipliers are high, a frontloaded fiscal consolidation reduces the total consolidation effort and implies a faster stabilisation of the debt ratio. In general, backloading is subject to higher implementation risks, most notably in the light of political economy considerations. Overall, when determining the fiscal adjustment path, both the short-term costs and the longer-term benefits need to be taken into account. Particular attention should be paid to the composition of consolidation packages, with well-designed adjustments likely to imply a faster stabilisation of the debt ratio.

Keywords: Fiscal policies; Government debt; Sustainability; Macroeconomic Aspects of Public Finance. (search for similar items in EconPapers)
JEL-codes: E6 H30 H6 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (17)

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Working Paper: Fiscal multipliers and beyond (2015)
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