Debt Reduction, Fiscal Adjustment, and Growth in Credit-Constrained Economies

Emanuele Baldacci, Sanjeev Gupta and Carlos Mulas-Granados

Journal of Applied Economics, 2015, vol. 18, issue 1, 71-97

Abstract: This paper assesses the effects of fiscal consolidations associated with public debt reduction on medium-term output growth during periods of private debt deleveraging. The analysis covers 107 countries and 79 episodes of public debt reduction driven by discretionary fiscal adjustments during the 1980–2012 period. It shows that expenditure-based, front-loaded fiscal adjustments can dampen growth when there are credit supply restrictions. Instead, fiscal adjustments that are gradual and rely on a mix of revenue and expenditure measures can support output expansion, while reducing public debt. In this context, protecting public investment is critical for medium-term growth, as is the implementation of supply-side, productivity-enhancing reforms.

Date: 2015
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DOI: 10.1016/S1514-0326(15)30004-0

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