Successful Austerity in the United States, Europe and Japan

62 Pages Posted: 1 Nov 2012

See all articles by Nicoletta Batini

Nicoletta Batini

International Monetary Fund (IMF)

Giovanni Callegari

International Monetary Fund

Giovanni Melina

International Monetary Fund (IMF)

Date Written: July 2012

Abstract

The output effects of 2009 fiscal expansions have been hotly debated. But the discussion of fiscal multipliers is even more relevant now that several European countries have had to quickly retract their stimulus measures in an effort to regain market confidence. Using regime-switching VARs we estimate the impact of fiscal adjustment on the United States, Europe and Japan allowing for fiscal multipliers to vary across recessions and booms. We also estimate ex ante probabilities of recessions derived in association with different-sized and different types of consolidation shocks (expenditure- versus tax-based). We use these estimates to understand how consolidations should be designed to be most effective in terms of permanently and rapidly reducing a country’s debt-to-GDP ratio. The main finding is that smooth and gradual consolidations are to be preferred to frontloaded or aggressive consolidations, especially for economies in recession facing high risk premia on public debt, because sheltering growth is key to the success of fiscal consolidation in these cases.

Keywords: Fiscal Consolidation, Fiscal Multipliers, Growth-friendly Fiscal Policy, Adjustment Process, External Shocks, Government Expenditures, Public Debt, Risk Management

JEL Classification: E62, F41, H30, H63

Suggested Citation

Batini, Nicoletta and Callegari, Giovanni and Melina, Giovanni, Successful Austerity in the United States, Europe and Japan (July 2012). IMF Working Paper No. 12/190. Available at SSRN: https://ssrn.com/abstract=2169736

Nicoletta Batini (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Giovanni Callegari

International Monetary Fund ( email )

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

Giovanni Melina

International Monetary Fund (IMF) ( email )

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

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