The Modality of Fiscal Consolidation and Current Account Adjustment

Antonis Adam and Thomas Moutos

No 5451, CESifo Working Paper Series from CESifo

Abstract: In this paper we argue that supply-side adjustments (i.e. the reallocation of productive resources between the traded and non-traded sectors) can be an important determinant of the output costs of current account adjustment. The argument relies on the fact that tax evasion is more prevalent in the non-traded sector, which is dominated by services and the self-employed. Heavy reliance on tax-based fiscal consolidations induces a reallocation of economic activity towards the non-traded sector, thus requiring a larger decline in domestic absorption (and output) per unit of improvement in the current account balance. Using IMF data for the period 1980-2011 we find that budget consolidations which rely more on tax increases than on spending decreases will be associated with larger output costs per unit of current account improvement.

Keywords: current account adjustment; fiscal consolidation; sacrifice ratio; tax evasion (search for similar items in EconPapers)
JEL-codes: E62 F32 F41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp5451.pdf (application/pdf)

Related works:
Journal Article: The Modality of Fiscal Consolidation and Current Account Adjustment (2017)
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:ces:ceswps:_5451

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().