Global Fiscal Consolidation

CAMA Working Paper No. 9/2011

24 Pages Posted: 1 May 2011

See all articles by Warwick J. McKibbin

Warwick J. McKibbin

Australian National University

Andrew Stoeckel

Australian National University (ANU)

Date Written: May 1, 2011

Abstract

The build up in government debt in response to the 'great recession' has raised a number of policy dilemmas for individual countries as well as the world as a whole. Where the government fiscal stimulus was seen as necessary to restore confidence to markets and stimulate deteriorating economies in the aftermath of the 'great recession' by 2010 the massive fiscal stimulus programs and associated run-up in debt had, for many economies, become a confidence sapping exercise. This need for a change of fiscal policy stance has fueled another debate that has two related aspects. One is the impact of fiscal consolidation on economies that are tightening and the flow-on effects to the world economy. The other debate is how much tightening there should be and how quickly.

This paper explores these issues in a global framework focusing on the national and global consequences of coordinated fiscal consolidation. It explores the implications this fiscal adjustment might have on country risk premia and what happens if all countries coordinate their fiscal adjustment except the United States. A coordinated fiscal consolidation in the industrial world that is not accompanied by US actions is likely to lead to a substantial worsening of trade imbalances globally as the release of capital in fiscally contracting economies flows into the US economy, appreciates the US dollar and worsens the current position of the US. The scale of this change is likely to be sufficient to substantially increase the probability of a trade war between the United States and other economies. In order to avoid this outcome, a coordinated fiscal adjustment is clearly in the interest of the global economy.

Suggested Citation

McKibbin, Warwick J. and Stoeckel, Andrew, Global Fiscal Consolidation (May 1, 2011). CAMA Working Paper No. 9/2011, Available at SSRN: https://ssrn.com/abstract=1828363 or http://dx.doi.org/10.2139/ssrn.1828363

Warwick J. McKibbin (Contact Author)

Australian National University ( email )

Crawfrod School of Public Policy
Canberra, ACT 2600
Australia
02-61250301 (Phone)
02-62735575 (Fax)

HOME PAGE: http://www.sensiblepolicy.com

Andrew Stoeckel

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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