The Economic Effects of Fiscal Consolidation with Debt Feedback

Marcello Estevão and Issouf Samaké

No 2013/136, IMF Working Papers from International Monetary Fund

Abstract: The past several years of recession and slow recovery have raised much interest on the effect of fiscal stimulus on economic activity, even as high public debts in many countries would call for fiscal consolidation. To evaluate the delicate balance between stimulus and consolidation requires measuring the size of fiscal multipliers, which often depends on having quarterly data so that exogenous fiscal policy shocks can be identified. We estimate fiscal multipliers using a novel methodology for identifying fiscal shocks within a structural vector autoregressive approach using annual data while controling for debt feedback effects. The estimation focuses on regions with scarce quarterly data (mostly low-income countries), and uses results for advanced economies, emerging market countries, and other broad groupings for which alternative estimates are available to validate the methodology. Differently from advanced and emerging market economies, fiscal consolidation in low-income countries has only a small temporary negative effect on growth while raising medium-term output. Shifting the composition of public spending toward capital expenditure further supports long-run growth.

Keywords: WP; Central America; Identification; Fiscal mulpiliers; Consolidation; SVECM; debt feedback effect; spending cut; oil-producer country; spending multiplier; tax shock; fiscal policy reaction; current spending multiplier; A. fiscal policy; fiscal policy policy change; counter-cyclical fiscal policy; emerging market country; fiscal policy shock; Fiscal consolidation; Fiscal multipliers; Current spending; Sub-Saharan Africa; Global (search for similar items in EconPapers)
Pages: 51
Date: 2013-05-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40614 (application/pdf)

Related works:
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:imf:imfwpa:2013/136

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().