- Description
- 35 p.; 21 x 29.7cm.
- Summary
- In many OECD countries debt has soared to levels threatening fiscal sustainability, necessitating its reduction over the medium to longer term. This paper uses stylised simulations in a small, calibrated macroeconomic model which features endogenous interactions between fiscal policy, growth and financial markets. Simulations are done for a hypothetical economy, reflecting key characteristics of fiscally stressed OECD countries. Given the assumed objective to stabilise debt at a 60% of GDP target within 20 years, a consolidation path is chosen by maximising cumulative GDP growth and minimising cumulative squared output gaps. The simulations highlight four issues. First, lowering the debt-to-GDP ratio within a finite horizon requires big initial consolidation which can be largely unwound if debt is to be stabilised at a lower level. Second, some frontloading of the adjustment turns out to be optimal in case of an interest rate shock. Third, debt reduction with high fiscal multipliers, hysteresis effects and adverse market reactions involves protracted large negative output gaps and deflation. This stresses the importance of selecting reasonable fiscal targets consistent with market conditions. Fourth, delaying the attainment of the debt target by two years has generally little implications for initial consolidation, though under adverse conditions this would result in much higher debt and slower growth.
- Series Statement
- OECD Economics Department Working Papers, 1815-1973 ; no.992
- Uniform Title
- OECD Economics Department Working Papers, no.992.
- Subject
- Economics
- LCCN
- 10.1787/5k92n2xg106g-en
- OCLC
- oecd-lib
- Author
Rawdanowicz, Łukasz.
- Title
Choosing the Pace of Fiscal Consolidation [electronic resource] / Łukasz Rawdanowicz
- Imprint
Paris : OECD Publishing, 2012.
- Series
OECD Economics Department Working Papers, 1815-1973 ; no.992
OECD Economics Department Working Papers, 1815-1973 ; no.992.
- Connect to:
- Indexed Term
Economics
- Other Standard Identifier
10.1787/5k92n2xg106g-en doi