The cost of fiscal tightening in Poland on the road to the Euro: does the labour market matter? (CGE model simulations)

Michał Gradzewicz, Tomasz Jędrzejowicz and Zbigniew Żółkiewski

MPRA Paper from University Library of Munich, Germany

Abstract: The paper presents an assessment of macroeconomic and also some selected structural consequences of the proposed fiscal consolidation necessary for Poland to fulfil the Maastricht fiscal criteria. The fiscal adjustments are assessed with a CGE model simulated over the 2006–2008 horizon. Two sets of simulations are analysed, namely rigid vs. flexible wages. It is shown that the fiscal tightening programme analysed in this paper does not necessarily incur any costs in terms of aggregate GDP loss in years 2006–2008. On the contrary, it may generate additional growth effects, provided that downward wage adjustments reduce unit labour costs, thus fostering the growth. It is concluded that the condition for the achievement of a smooth and relatively low-cost fiscal adjustment is to supplement it with labour market reform.

Keywords: fiscal reform; Maastricht criteria; labour market; CGE model (search for similar items in EconPapers)
JEL-codes: E62 H30 J38 (search for similar items in EconPapers)
Date: 2007-04
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Published in Bank i Kredyt 4.2007(2007): pp. 3-17

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