Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances

35 Pages Posted: 28 Feb 2012

See all articles by Bertrand Gruss

Bertrand Gruss

International Monetary Fund (IMF)

José Torres

affiliation not provided to SSRN

Date Written: Janurary 2012

Abstract

In this paper we use a general equilibrium model with heterogeneous agents to assess the macroeconomic and welfare consequences in the United States of alternative fiscal policies over the medium-term. We find that failing to address the fiscal imbalances associated with current federal fiscal policies for a prolonged period would result in a significant crowding-out of private investment and a severe drag on growth. Compared to adopting a reform that gradually reduces federal debt to its pre-crisis level, postponing debt stabilization for two decades would entail a permanent output loss of about 17 percent and a welfare loss of almost 7 percent of lifetime consumption. Moreover, the long-run welfare gains from the adjustment would more than compensate the initial losses associated with the consolidation period.

Keywords: Debt reduction, Economic models, Fiscal policy, Public debt, Welfare

Suggested Citation

Gruss, Bertrand and Torres, José, Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances (Janurary 2012). IMF Working Paper No. 12/38. Available at SSRN: https://ssrn.com/abstract=2012223

Bertrand Gruss (Contact Author)

International Monetary Fund (IMF) ( email )

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

José Torres

affiliation not provided to SSRN

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