Fiscal Consolidation in a Small Euro Area Economy

Gabriela Castro (), José Maria and Vanda Almeida
Authors registered in the RePEc Author Service: Ricardo Mourinho Félix ()

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: This article focuses on the costs and benefits of a fiscal consolidation in a small euro area economy. The macroeconomic impacts and the welfare analysis are conducted in a New-Keynesian general equilibrium model with non-Ricardian agents. We define a benchmark fiscal consolidation strategy based on a permanent reduction in Government expenditure. We find that, over the long run, fiscal consolidation leads to a considerable increase in the level of output and consumption, and is welfare improving. In addition, the gains are boosted if the fiscal strategy also involves a tax reform that shifts the tax burden away from labour income towards the final goods consumption. However, important short-run costs arise, notably output, consumption and welfare losses. Finally, we assess the effect of alternative fiscal consolidation paths in terms of the degree of front loading, the speed of its completion and the interaction with risk premium.

JEL-codes: E62 F41 H62 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Fiscal Consolidation in a Small Euro-Area Economy (2013)
Journal Article: Fiscal consolidation in a small euro area economy (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201105

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