Fiscal Consolidations: A Theoretical Essay with a Heterogeneous-Agent Model

Miguel Viegas and Ana Paula Ribeiro

International Economic Journal, 2017, vol. 31, issue 2, 206-223

Abstract: Since the emergence of the financial crisis, most of the EU countries have promoted impressive public interventions to support financial institutions, contributing to a significant rise in general government gross debt-to-GDP ratios. As such, the issue of how to best pursue a fiscal consolidation will become crucial regarding the fiscal policy stance. This paper aims at characterizing four different stylized debt consolidation strategies extensively identified in the literature (one pure revenue-based and three expenditure-based) in order to assess welfare affects and, in particular, the inequality effects involved. For this purpose, we built a general equilibrium heterogeneous-agent model capable of exploring the relationship between fiscal policy and the endogenous cross-section distribution of income and wealth. Moreover, we decompose the impacts on welfare criteria in order to distinguish pure efficiency effects from insurance and inequality effects. According to our simulations, the adjustment based on the reduction of unproductive expenditures came out to be the most welfare-enhancing compared to those based on tax increases or on social transfer reductions.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:taf:intecj:v:31:y:2017:i:2:p:206-223

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DOI: 10.1080/10168737.2017.1315159

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