Reassessing the Fiscal Mix for Successful Debt Reduction

42 Pages Posted: 3 Jul 2012

See all articles by Carlos Mulas‐Granados

Carlos Mulas‐Granados

affiliation not provided to SSRN

Sanjeev Gupta

International Monetary Fund (IMF) - Fiscal Affairs Department

Emanuele Baldacci

International Monetary Fund (IMF) - Fiscal Affairs Department

Date Written: July 2012

Abstract

This paper assesses the determinants of the duration of debt reduction episodes in a large sample of countries over the last three decades using a survival model. Results show that increases in the primary balances are the main source of debt reduction. Expenditure‐based fiscal adjustments are key for reducing the length of debt consolidation spells, including in the aftermath of financial crises. Political fragmentation and the proximity of elections make debt sustainability more difficult to achieve, while structural reforms that help spur growth decrease the duration of debt reduction. In contrast to previous findings, however, we show that when adjustment needs are large – as in many advanced economies today – fiscal consolidations that rely also on revenue‐enhancing measures are more likely to accelerate debt reduction. We label it as the ‘Rebalancing Adjustment Effect’. This result is particularly strong when countries experience a financial crisis.

Suggested Citation

Mulas‐Granados, Carlos and Gupta, Sanjeev and Baldacci, Emanuele, Reassessing the Fiscal Mix for Successful Debt Reduction (July 2012). Economic Policy, Vol. 27, Issue 71, pp. 365-406, 2012. Available at SSRN: https://ssrn.com/abstract=2098364 or http://dx.doi.org/10.1111/j.1468-0327.2012.00287.x

Carlos Mulas‐Granados

affiliation not provided to SSRN

No Address Available

Sanjeev Gupta

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Emanuele Baldacci

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

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