Fiscal multipliers and beyond

Pablo Hernández de Cos, Thomas Warmedinger and Cristina Checherita-Westphal
Authors registered in the RePEc Author Service: Cristina Checherita Westphal

No 162, Occasional Paper Series from European Central Bank

Abstract: This paper seeks to link the debate surrounding short-term fiscal multipliers with the medium and longer-term impact of fiscal consolidation on public debt sustainability. A literature review and empirical findings for state-dependent multipliers confirm that there is considerable uncertainty surrounding the size of the short-term multiplier. Notably, multipliers may be larger in deep recessions or financial crises, but the negative impact of fiscal consolidation is mitigated when public finances are weak. Using a stylised framework and a range of plausible values for the fiscal multiplier, simulations suggest that an increase in the debt ratio following episodes of fiscal consolidation is likely to be short-lived. Even in a macroeconomic context in which multipliers are high, a front-loaded fiscal consolidation reduces the total consolidation effort and implies a faster stabilisation of the debt ratio. In general, back-loading is subject to higher implementation risks, most notably in the light of political economy considerations. Overall, when determining the fiscal adjustment path, both the short-term costs and the longer-term benefits need to be taken into account. Particular attention should be paid to the composition of consolidation packages, with well-designed adjustments likely to imply a faster stabilisation of the debt ratio. JEL Classification: H30, H6, E6

Keywords: fiscal policies; government debt; Macroeconomic Aspects of Public Finance; Sustainability (search for similar items in EconPapers)
Date: 2015-06
Note: 375746
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Fiscal Multipliers and Beyond (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbops:2015162

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