Fiscal Austerity in Emerging Market Economies

Chetan Dave, Chetan Ghate, Pawan Gopalakrishnan and Suchismita Tarafdar

MPRA Paper from University Library of Munich, Germany

Abstract: We build a small open economy RBC model with financial frictions to analyze expansionary fiscal consolidations in emerging market economies (EMEs). We calibrate the model to India, which we view as a proto-typical EME. When factor income tax rates are low, a contractionary fiscal shock has an expansionary effect on output. The economy's debt/GDP ratio falls, and tax revenues rise. When factor income tax rates are high, a contractionary fiscal shock has an expansionary effect on output if government spending is valued sufficiently highly relative to private consumption by households in utility. We identify the mechanisms behind these results, and their implications for actual economies undertaking fiscal reforms.

Keywords: Expansionary Fiscal Consolidations; Fiscal Policy in Small Open Economies; Emerging Market Business Cycles; Financial Frictions. (search for similar items in EconPapers)
JEL-codes: E32 E6 E62 (search for similar items in EconPapers)
Date: 2018-05-14
New Economics Papers: this item is included in nep-dge and nep-mac
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https://mpra.ub.uni-muenchen.de/87086/1/MPRA_paper_87086.pdf original version (application/pdf)

Related works:
Journal Article: Fiscal austerity in emerging market economies (2021)
Working Paper: Fiscal Austerity in Emerging Market Economies (2019)
Working Paper: Fiscal Austerity in Emerging Market Economies (2018)
Working Paper: Fiscal Austerity in Emerging Market Economies (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:87086

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