Fiscal consolidation in the euro area: Long-run benefits and short-run costs

Coenen, Günter; Mohr, Matthias; Straub, Roland

doi:10.1016/j.econmod.2007.11.011

Cited by 80 publications

(104 citation statements)

References 15 publications

(15 reference statements)

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“…Unfortunately, the empirical evidence on this issue is also contradictory (see e.g. Coenen et al (2008), or Afonso (2010)). In general, the uncertainty surrounding the consequences of fiscal measures reflects the lack of consensus on how close to a pure Keynesian framework developed economies are.…”

Section: Introductionmentioning

confidence: 99%

“…Recently, Afonso (2010) has shown that effects of this type are present in the EA when consolidation schemes considerably reduce the real rate of interest and thus the financing cost of the debt. Coenen et al (2008), on the other hand, using the estimated New-area wide model employed at the ECB, show that fiscal consolidations are always contractionary in the short run, even though they may generate positive long run output effects. also confirm that short run costs could be large.…”

Section: Consolidation Schemesmentioning

confidence: 99%

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Fiscal policy, pricing frictions and monetary accommodation

Canova

Pappa

2011

Economic Policy

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We investigate the theoretical conditions for effectiveness of government consumption expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place when monetary policy is accommodative lead to large output multipliers in normal times. The 2009-2010 packages need not produce significant output multipliers, may have moderate debt effects, and only generate temporary inflation. Expenditure expansions accompanied by deficit/debt consolidations schemes may lead to short run output gains but their success depends on how monetary policy and expectations behave. Trade openness and the cyclicality of the labor wedge explain cross-country differences in the magnitude of the multipliers.JEL classification: C32, E62, E63.

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Section: Introductionmentioning

confidence: 99%

Section: Consolidation Schemesmentioning

confidence: 99%

Fiscal policy, pricing frictions and monetary accommodation

Canova

Pappa

2011

Economic Policy

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“…The labor tax rate is set toτ d = 0.10. The consumption tax rate is calibrated to beτ C = 0.18 (see Coenen, Mohr and Straub, 2008). This endogenously determines the private consumption to output ratio and the government consumption to output ratio which are equal to γ C = 0.74 and γ G = 0.26.…”

Section: Calibration Strategymentioning

confidence: 99%

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Mayer

Stähler

2011

Empirica

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Abstract:In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors.Keywords: fiscal policy, debt brake, welfare, dsge.JEL classification: E 32, G 61, E 62. Non-technical summaryThe possibilities and limits of fiscal policy regarding economic stabilization have moved center stage lately, certainly also prompted by the current economic downturn. In this context, it is continuously stressed that it is necessary to assure sustainability of public finances and the confidence therein. This can be achieved not least by reliable consolidation after the crisis, and -at least in normal times -by rule-based budget requirements. For example, the International Monetary Fund recently identified a possible positive role for rule-based fiscal policy emphasizing that is must be sustainable and reliable if countercyclical fiscal policy is to unfold its desired effects. While in the 1970s, there seemed to be confidence in somewhat active discretionary fiscal policy, further developments have shown that rule-based actions are needed because of reasons revealed in the political economic literature. This insight is also the basis for the fiscal framework of the European (monetary) union.The focus of the present paper is on the analysis of a rule-based fiscal policy, in particular, the "debt brake", which is expected to be introduced in Germany soon and has already been implemented in Switzerland. The discussion about the introduction of the debt brake has to be seen in the context of European fiscal rules, namely the European Stability and Growth Pact (SGP). As a rule, the SGP demands roughly balanced budgets in structural terms, while letting the automatic stabilizers take effect. The corrective arm of the pact is called on particularly if the 3% deficit ceiling is violated. The 60% debt ceiling also plays a role. As German national budgetary rules have not been consistent with the European framework, and they were largely assessed as being inappropriate with a view to limiting the increase in public debt, this was the hour of birth of the "Förderalismuskommission II" (federalism reform commission), which recently agreed on a proposal for the DB.Similar to the SGP, the debt brake demands (almost) structurally balanced budgets and, thus, ties cyclically adjusted government spending (including interest on outstanding debt) to cyclically adjusted trend revenues raised by the government and, therefore, acts as an automatic stabilizer since the government finances some of its expenditures from deficits in "bad times" while accumulating surpluses...

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“…First, it is related to the literature on debt consolidation (see e.g. Coenen et al, 2008, Forni et al, 2010, European Commission, 2010, Papageorgiou, 2012, and Bi et al, 2012. This literature focuses on the best possible mix of spending cuts and tax rises.…”

Section: Introductionmentioning

confidence: 99%

Smaller Public Sectors in the Euro Area: Aggregate and Distributional Implications

Economides

Papageorgiou²,

Philippopoulos

et al. 2012

CESifo Economic Studies

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. In this paper, we study the aggregate and distributional implications of a smaller public sector in the euro area. By a smaller public sector, we mean a reduction in public debt and/or cuts in public spending, when such changes in fiscal policy are accommodated by adjustment in various taxes. Aggregate implications have to do with per capita output and welfare, while distribution refers to differences in income and welfare between private and public sector employees. We solve the model numerically using fiscal data from the euro area and then do a number of policy experiments. The general message is that the issue is not just a smaller public sector, but also the spending-tax mix chosen. Terms of use: Documents in EconStor mayJEL-Code: H100, H300, H200.

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Fiscal consolidation in the euro area: Long-run benefits and short-run costs

Cited by 80 publications

References 15 publications

Fiscal policy, pricing frictions and monetary accommodation

Fiscal policy, pricing frictions and monetary accommodation

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Smaller Public Sectors in the Euro Area: Aggregate and Distributional Implications

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