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Fiscal Consolidation in Israel: A Global Fiscal Model Perspective

Selim Elekdag, Natan Epstein and Marialuz Moreno-Badía

Emerging Markets Finance and Trade, 2007, vol. 43, issue 6, 67-86

Abstract: Fiscal consolidation has become a central policy prescription for many highly indebted emerging market countries (EMCs). Although prudent fiscal policies tend to reduce vulnerabilities, their implementation is usually postponed. This paper is one of the first attempts in the literature to quantify the costs of delaying fiscal consolidation in an EMC. Using the International Monetary Fund's Global Fiscal Model, we find that early consolidation through expenditure cuts results in a substantial increase in Israel's long-term output growth over delayed fiscal adjustment. Moreover, the more flexible are the factor markets, the larger is this output gain.

Keywords: distortionary taxes; fiscal consolidation; government debt (search for similar items in EconPapers)
Date: 2007
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