When Fiscal Consolidation Meets Private Deleveraging

Javier Andrés (), Oscar Arce (), Dominik Thaler and Carlos Thomas

Review of Economic Dynamics, 2020, vol. 37, 214-233

Abstract: Inspired by the recent experience in some euro area countries, we analyze the interaction between fiscal consolidation and private deleveraging in a model of a small open economy in a monetary union. The coexistence of long-term private debt and collateral constraints on new loans implies that, following an adverse financial shock, the economy enters a slow private deleveraging process, the duration of which is endogenous to collateral and debt dynamics. In this context, large and/or front-loaded consolidations increase the length and depth of private deleveraging, causing higher relative output losses over the medium run. As a result, such aggressive consolidation strategies entail larger present-value multipliers. Our results thus speak in favor of 'deleveraging-friendly' (smaller/more gradual) consolidations. (Copyright: Elsevier)

Keywords: Fiscal consolidations; Long term private debt; Financial shock (search for similar items in EconPapers)
JEL-codes: E44 E60 E62 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (10)

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DOI: 10.1016/j.red.2020.02.002

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