Painful Medicine

Finance & Development, September 2011

4 Pages Posted: 29 Sep 2011

See all articles by Laurence Ball

Laurence Ball

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER); International Monetary Fund (IMF)

Daniel Leigh

International Monetary Fund (IMF)

Prakash Loungani

International Monetary Fund (IMF)

Date Written: September 27, 2011

Abstract

Will deficit reduction lead to stronger growth and job creation in the short run? Recent IMF research provides an answer to this question. Evidence from data over the past 30 years shows that consolidation lowers incomes in the short term, with wage-earners taking more of a hit than others; it also raises unemployment, particularly long-term unemployment. Advanced economies need to restore fiscal sustainability through credible consolidation plans. At the same time, slamming on the brakes too quickly will hurt the recovery and worsen job prospects. Hence the potential longer-run benefits of fiscal consolidation must be balanced against the short- and medium-run adverse impacts on growth and jobs.

Keywords: fiscal consolidation, fiscal austerity, unemployment, jobs, wages

JEL Classification: E32, E62, H20, H5, N10

Suggested Citation

Ball, Laurence M. and Leigh, Daniel and Loungani, Prakash, Painful Medicine (September 27, 2011). Finance & Development, September 2011. Available at SSRN: https://ssrn.com/abstract=1934422

Laurence M. Ball

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States
410-516-7605 (Phone)
410-516-7600 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
410-516-7605 (Phone)
410-516-7600 (Fax)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Daniel Leigh

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Prakash Loungani (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7043 (Phone)
202-623-4740 (Fax)

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