Fiscal Consolidation Under Imperfect Credibility

Matthieu Lemoine and Jesper Lindé

No 322, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: This paper examines the effects of expenditure-based fiscal consolidation when credibility as to whether the cuts will be long-lasting is imperfect. We contrast the impact limited credibility has when the consolidating country has the means to tailor mon- etary policy to its own needs, with the impact when the country is a small member of a currency union with a negligible effect on interest rates and on nominal exchange rates of the currency union. We find two key results. First, in the case of an independ- ent monetary policy, the adverse impact of limited credibility is relatively small, and consolidation can be expected to reduce government debt at a relatively low output cost given that monetary policy provides more accommodation than it would under perfect credibility. Second, the lack of monetary accommodation under currency union membership implies that the output cost may be significantly larger, and that progress in reducing government debt in the short and medium term may be limited under imperfect credibility.

Keywords: Monetary and Fiscal Policy; Front-Loaded vs. Gradual Consolidation; DSGE Model; Sticky Prices and Wages; Currency Union (search for similar items in EconPapers)
JEL-codes: E32 F41 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2016-05-01
New Economics Papers: this item is included in nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://www.riksbank.se/Documents/Rapporter/Working ... rap_wp322_160512.pdf (application/pdf)

Related works:
Journal Article: Fiscal consolidation under imperfect credibility (2016)
Working Paper: Fiscal Consolidation Under Imperfect Credibility (2016)
Working Paper: Fiscal Consolidation Under Imperfect Credibility (2016)
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:hhs:rbnkwp:0322

Access Statistics for this paper

More papers in Working Paper Series from Sveriges Riksbank (Central Bank of Sweden) Sveriges Riksbank, SE-103 37 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Lena Löfgren ().