Fiscal Consolidation in a Low-Inflation Environment: Pay Cuts versus Lost Jobs
Evi Pappa (),
Rana Sajedi and
Additional contact information
Guilherme Bandeira: Banco de España
International Journal of Central Banking, 2018, vol. 14, issue 3, 7-52
We construct a model of a monetary union to study fiscal consolidation in the periphery of the euro area, through cuts in public-sector wages or hiring when the nominal interest rate is constrained at its lower bound. Consolidation induces a positive wealth effect that increases demand, as well as a reallocation of workers towards the private sector, which together boost private activity. However, in a low-inflation environment, demand is suppressed and the private sector is not able to absorb the additional workers. Comparing the two instruments, cuts in public hiring increase unemployment persistently in this environment, while wage cuts can reduce it. Regions with higher mobility of labor between the two sectors are able to consolidate more effectively. Price flexibility is also key at the zero lower bound: for a higher degree of price rigidity in the periphery, consolidation becomes harder to achieve. Consolidations can be self-defeating when the public good is productive.
JEL-codes: E32 E62 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed
Downloads: (external link)
Working Paper: Fiscal Consolidations in a Low Inflation Environment:Pay cuts versus Lost Jobs (2017)
Working Paper: Fiscal Consolidation in a Low Inflation Environment: Pay Cuts versus Lost Jobs (2017)
Working Paper: Fiscal consolidation in a low inflation environment: pay cuts versus lost jobs (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2018:q:2:a:1
Access Statistics for this article
International Journal of Central Banking is currently edited by Loretta J. Mester
More articles in International Journal of Central Banking from International Journal of Central Banking
Bibliographic data for series maintained by Bank for International Settlements ().