Assessing the Impact and Phasing of Multi-Year Fiscal Adjustment: A General Framework

32 Pages Posted: 11 Sep 2013

See all articles by Ran Bi

Ran Bi

International Monetary Fund (IMF)

Haonan Qu

International Monetary Fund (IMF)

James Roaf

International Monetary Fund (IMF)

Date Written: August 2013

Abstract

This paper provides a general framework to assess the output and debt dynamics of an economy undertaking multi-year fiscal adjustment. The framework allows country-specific assumptions about the magnitude and persistence of fiscal multipliers, hysteresis effects, and endogenous financing costs. In addition to informing macro projections, the framework can also shed light on the appropriate phasing of fiscal consolidation - in particular, on whether it should be front- or back-loaded. The framework is applied to stylized advanced and emerging economy examples. It suggests that for a highly-indebted economy undertaking large multi-year fiscal consolidation, high multipliers do not always argue against frontloaded adjustment. The case for more gradual or back-loaded adjustment is strongest when hysteresis effects are in play, but it needs to be balanced against implications for debt sustainability. Application to actual country examples tends to cast doubt on claims that very large multipliers have been operating post-crisis. It seems that the GDP forecast errors for Greece may have been due more to over-optimism on potential growth estimates than to underestimating fiscal multipliers.

Keywords: Fiscal consolidation, Economic recession, Public debt, Fiscal policy, Debt sustainability, Developed countries, Developing countries, Fiscal Multiplier, Hysteresis Effect, Phasing of Fiscal Consolidation, fiscal adjustment, fiscal multipliers, fiscal tightening, fiscal stance, structural fiscal, fiscal adjustments, fiscal sustainability, fiscal measures, primary deficit, fiscal adjustment efforts, fiscal austerity, fiscal stimulus, fiscal expansion, government spending, fiscal balances, fiscal impact, size of multipliers, government expenditure, public expenditures, fiscal rectitude, fiscal policy debt, spending cuts, public spending, fiscal affairs, tax policy, fiscal affairs department, fi

JEL Classification: E32, E62, H68, H30

Suggested Citation

Bi, Ran and Qu, Haonan and Roaf, James, Assessing the Impact and Phasing of Multi-Year Fiscal Adjustment: A General Framework (August 2013). IMF Working Paper No. 13/182. Available at SSRN: https://ssrn.com/abstract=2324177

Ran Bi

International Monetary Fund (IMF) ( email )

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

Haonan Qu

International Monetary Fund (IMF) ( email )

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

James Roaf

International Monetary Fund (IMF) ( email )

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

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