Fiscal Consolidation Strategy

35 Pages Posted: 28 Sep 2012

See all articles by John F. Cogan

John F. Cogan

Stanford University - The Hoover Institution on War, Revolution and Peace; National Bureau of Economic Research (NBER)

John B. Taylor

Stanford University; National Bureau of Economic Research (NBER)

Volker Wieland

University of Frankfurt

Maik H. Wolters

Kiel Institute for the World Economy - IFW

Date Written: July 2012

Abstract

In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact. We consider two types of dynamic stochastic general equilibrium models: a neoclassical growth model and more complicated models with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the initial model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run.

Keywords: budget deficit, fiscal consolidation strategy, fiscal policy, government debt, U.S. budget

JEL Classification: E27, E62, H30, H63

Suggested Citation

Cogan, John F. and Taylor, John B. and Wieland, Volker and Wolters, Maik H., Fiscal Consolidation Strategy (July 2012). CEPR Discussion Paper No. DP9041. Available at SSRN: https://ssrn.com/abstract=2153472

John F. Cogan (Contact Author)

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

HHMB Rm 347
Stanford, CA 94305
United States
(650) 723-2585 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John B. Taylor

Stanford University ( email )

Stanford, CA 94305
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Volker Wieland

University of Frankfurt ( email )

House of Finance
Gr├╝neburgplatz 1
Frankfurt am Main, D-60323
Germany
+49 69 798 33805 (Phone)
+49 69 798 33907 (Fax)

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

Maik H. Wolters

Kiel Institute for the World Economy - IFW ( email )

United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
3
Abstract Views
664
PlumX Metrics