The macroeconomics of fiscal consolidations in euro area countries

We simulate a currency union dynamic general equilibrium model to assess the macroeconomic implications of permanently reducing the public debt-to-gross domestic product (GDP) ratio in euro area countries. We obtain the following results. First, tax distortions are quantitatively significant. Second...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2010-09, Vol.34 (9), p.1791-1812
Main Authors: Forni, Lorenzo, Gerali, Andrea, Pisani, Massimiliano
Format: Article
Language:English
Subjects:
Budgetary policy
Debt management
Debt policy
Distortionary taxation
Economic and Monetary Union
Europe
Eurozone
Fiscal consolidation
Fiscal consolidation Monetary union Distortionary taxation General equilibrium models
GDP
General equilibrium models
Gross Domestic Product
Monetary union
Monetary unions
National budget
Public debt
Public finance
Public finance situation
Simulation
Studies
Tax rates
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Summary:We simulate a currency union dynamic general equilibrium model to assess the macroeconomic implications of permanently reducing the public debt-to-gross domestic product (GDP) ratio in euro area countries. We obtain the following results. First, tax distortions are quantitatively significant. Second, the best fiscal consolidation strategy is to permanently reduce both expenditures and tax rates. Third, under such a consolidation strategy the transition is generally not costly, as the GDP and investment would grow, while private consumption would not fall. Finally, spillovers to the rest of the euro area are generally expansionary.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2010.06.017