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Fiscal Austerity in Emerging Market Economies

Chetan Dave (), Chetan Ghate (), Pawan Gopalakrishnan () and Suchismita Tarafdar

No 2019-5, Working Papers from University of Alberta, Department of Economics

Abstract: We build a small open economy RBC model with financial frictions to analyze the incidence of expansionary fiscal consolidations in emerging market economies (EMEs). We calibrate the model to India, a proto-typical EME. We show that a spending based fiscal consolidation has an expansionary effect on output. In contrast, tax based consolidations are always contractionary. Either measure of consolidation, however, tends to increase the fiscal deficit and therefore the sovereign risk premia in our framework. Our findings support the results in the IMF WEO (2010), that tax based consolidation measures are more costly (in terms of GDP losses) than spending based consolidations in the short run. We identify new mechanisms that underlie the dynamics of fiscal reforms and their implications for successful fiscal consolidations.

Keywords: Expansionary Fiscal Consolidations; Fiscal Policy in Small Open Economies; Emerging Market Business Cycles; Financial Frictions (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019-04-23
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: Fiscal austerity in emerging market economies (2021) Downloads
Working Paper: Fiscal Austerity in Emerging Market Economies (2018) Downloads
Working Paper: Fiscal Austerity in Emerging Market Economies (2018) Downloads
Working Paper: Fiscal Austerity in Emerging Market Economies (2018) Downloads
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