Fiscal austerity in emerging market economies

Chetan Dave, Chetan Ghate, Pawan Gopalakrishnan and Tarafdar Suchismita ()
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Tarafdar Suchismita: Department of Economics, Shiv Nadar University, Gautam Buddha Nagar, Noida, 201314, Uttar Pradesh, India

Studies in Nonlinear Dynamics & Econometrics, 2021, vol. 25, issue 5, 365-391

Abstract: We build a small open economy RBC model with financial frictions to analyse spending and tax based fiscal consolidations in emerging market economies (EMEs). We show that if government spending is a substitute to private consumption in household utility, a spending based fiscal consolidation has an expansionary effect on output. In contrast, tax based consolidations are always contractionary irrespective of the strength of substitutability between government and private consumption. Our findings support the results in the World Economic Outlook (2010), USA: International Monetary Fund, that tax based consolidation measures are more costly (in terms of GDP losses) than spending based consolidations. We calibrate the model to India and calculate the fiscal multipliers associated with spending and tax based fiscal consolidations. Our paper identifies new mechanisms that underlie the dynamics of fiscal reforms and their implications for successful fiscal consolidations.

Keywords: emerging market business cycles; expansionary fiscal consolidations; financial frictions; fiscal policy in small open economies; the Indian economy (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2021
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Related works:
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)
Working Paper: Fiscal Austerity in Emerging Market Economies (2018)
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DOI: 10.1515/snde-2019-0042

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