Unpleasant debt dynamics: Can fiscal consolidations raise debt ratios?

Gabriela Castro (), Ricardo Félix (), Paulo Júlio and José Maria

Journal of Macroeconomics, 2015, vol. 44, issue C, 276-294

Abstract: Using PESSOA, a medium-scale DSGE model for a small euro-area economy, we evaluate how fiscal adjustments impact short- and medium-term debt dynamics and output for alternative policy options, and budgetary and economic conditions. Fiscal adjustments may increase the public debt-to-GDP ratio in the short run, even for consolidations carried out in normal times in economies characterized by moderate indebtedness levels. Financial turmoils and hikes in the nationwide risk premia, coupled with high indebtedness levels and stiff fiscal measures, boost the output costs of fiscal consolidations and severely affect their effectiveness in bringing the public debt-to-GDP ratio down in the short term. In the medium run credible fiscal adjustments entail a decline in the public debt ratio, though at potentially very large output losses when carried out under unfavorable budgetary and economic conditions.

Keywords: Fiscal policy; Fiscal consolidation; Debt ratio; Crisis; DSGE model; Euro area (search for similar items in EconPapers)
JEL-codes: E12 E30 E62 H60 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0164070415000427
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Unpleasant debt dynamics: Can fiscal consolidations raise debt ratios? (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:44:y:2015:i:c:p:276-294

DOI: 10.1016/j.jmacro.2015.02.009

Access Statistics for this article

Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().