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Fiscal Consolidations: Welfare Effects of the Adjustment Speed

Miguel Fonseca

MPRA Paper from University Library of Munich, Germany

Abstract: This work studies the response of social welfare to fiscal consolidations, by focusing on a less debated characteristic of fiscal plans: the speed of deleveraging. A neoclassical overlapping generations model is calibrated to the German economy, and a sequence of reductions of the same size in the debt-to-GDP ratio are simulated considering different adjustment periods. Welfare gains are found to be larger in slow, delayed fiscal consolidations, due to the presence of incomplete markets. It is also found that the aggregate welfare response depends on the distribution of wealth and the type of fiscal instrument used.

Keywords: Fiscal Consolidation; Wealth Inequality; Incomplete Markets; Consumption Smoothing Hypotesis (search for similar items in EconPapers)
JEL-codes: E13 E21 E62 H63 (search for similar items in EconPapers)
Date: 2020-01-06, Revised 2020-03-02
New Economics Papers: this item is included in nep-dge and nep-mac
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