Post-Crisis Recovery: When Does Increased Fiscal Discipline Work?

Pritha Mitra

No 2006/219, IMF Working Papers from International Monetary Fund

Abstract: Emerging market financial crises during the late 1990s were marked by sudden withdrawals of funds by foreign creditors, resulting in production declines. The IMF favored positive signals to potential foreign creditors and initially recommended disciplined fiscal policy during the height of crisis, countering standard Keynesian recommendations of expansionary fiscal stimulus. This paper formulates an open-economy general equilibrium model for resolving this policy conundrum and analyzing the impact of disciplined fiscal policy on post-crisis recovery. The model demonstrates via simulations that disciplined fiscal policy will improve (worsen) post-crisis recovery in the presence (absence) of appropriately defined production flexibility.

Keywords: WP; long-term debt; Financial crisis; Emerging markets; Fiscal policy; goods firm; tradable good; collateral constraint; firm hire; physical assets; Collateral; East Asia (search for similar items in EconPapers)
Pages: 43
Date: 2006-10-13
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Citations: View citations in EconPapers (3)

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