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Equitable fiscal consolidations

Maria Ferrara and Patrizio Tirelli ()

Economic Modelling, 2017, vol. 61, issue C, 207-223

Abstract: Empirical research has uncovered an equity-efficiency trade-off in alternative fiscal consolidation strategies. Spending-based adjustments are associated with more limited output losses but greater inequality than tax-based adjustments. Moreover, spending-based adjustments are less likely to be reversed, but an increase in inequality reduces the likelihood of achieving a successful consolidation. We investigate the issue of designing a debt consolidation plan which is achieved through a reduction in public consumption and yet is equitable because temporary targeted transfers and tax reductions stabilize consumption of the poorer part of the population. This causes a limited slow-down in the pace of debt reduction because fiscal multipliers associated to the tax/transfer policies are large.

Keywords: Fiscal Consolidation; DSGE modelling; Rule of Thumb Consumers; Fiscal Policy; Monetary Policy; Zero Lower Bound (search for similar items in EconPapers)
JEL-codes: E32 E62 E63 (search for similar items in EconPapers)
Date: 2017
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