How Delaying Fiscal Consolidation Affects the Present Value of GDP

32 Pages Posted: 14 Apr 2015

See all articles by Kevin Timothy Fletcher

Kevin Timothy Fletcher

International Monetary Fund (IMF)

Damiano Sandri

International Monetary Fund (IMF) - Research Department

Date Written: March 2015

Abstract

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to which the multiplier during the initial period of fiscal stimulus differs from the multiplier when the stimulus is withdrawn.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

Fletcher, Kevin Timothy and Sandri, Damiano, How Delaying Fiscal Consolidation Affects the Present Value of GDP (March 2015). IMF Working Paper No. 15/52. Available at SSRN: https://ssrn.com/abstract=2594136

Kevin Timothy Fletcher (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Damiano Sandri

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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