Austerity and Public debt Dynamics

Carlo Favero and ,

No 14072, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies the impact of multi-year fiscal consolidation plans on public debt dynamics. Studying the dynamic impact of narratively identified fiscal adjustment plans we find that tax based adjustments result in significant slowdowns of output and inflation but have almost no effect on the debt GDP ratio over a short to medium-term horizon. Spending cuts have instead milder recessionary effects, but contribute to a sustained reduction in the debt GDP ratio. Extending our model to study non-linearities in the dynamics related to the business-cycle and the public debt to GDP ratio, we find that the heterogeneous impact of tax-based and expenditure-based plans on debt mainly emerges mostly in recessions and when debt is increasing rapidly.

Keywords: Austerity; Public debt; Output growth; Fiscal adjustment plans (search for similar items in EconPapers)
JEL-codes: E60 E62 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (8)

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