How Delaying Fiscal Consolidation Affects the Present Value of GDP
32 Pages Posted: 14 Apr 2015
Date Written: March 2015
We develop a simple model to examine the conditions under which delaying fiscal consolidation can affect the present value of GDP via the fiscal stance’s effects on the output gap and hysteresis. We find that the absolute size of the fiscal multiplier - the focus of much empirical investigation and policy debate - is likely inconsequential in this regard. Rather, what matters is the degree to which the multiplier during the initial period of fiscal stimulus differs from the multiplier when the stimulus is withdrawn. If the multiplier is constant over time, delaying consolidation is unlikely to significantly boost the present value of GDP via effects on the output gap and hysteresis. The potential success of such efforts relies instead on exploiting time-variation in multipliers.
Keywords: Fiscal consolidation, Gross domestic product, Public debt, Fiscal stimulus and multipliers, Econometric models, hysteresis, fiscal multipliers, gdp, interest, interest rate, economy, fiscal policy, potential output, risks, costs
JEL Classification: E62
Suggested Citation: Suggested Citation