Budget Consolidation: Short-Term Pain and Long-Term Gain

Douglas Laxton, Susanna Mursula, Kevin Clinton and Michael Kumhof

No 2010/163, IMF Working Papers from International Monetary Fund

Abstract: The paper evaluates the costs and benefits of fiscal consolidation using simulations based on the IMFs global DSGE model GIMF. Over the longer run, well-targeted permanent reductions in budget deficits lead to a considerable increase in both the growth rate and the level of output. The gains may be enhanced by shifting some of the tax burden from incomes to consumption. In the short run, credibility plays a crucial role in determining the size of initial output loses. Global current account imbalances would be significantly reduced if budget consolidation was larger in countries with current account deficits.

Keywords: WP; current account; real interest rate; fiscal policy; present discounted value (search for similar items in EconPapers)
Pages: 33
Date: 2010-07-01
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Citations: View citations in EconPapers (10)

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