Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153336
Authors: 
Coenen, Günter
Mohr, Matthias
Straub, Roland
Year of Publication: 
2008
Series/Report no.: 
ECB Working Paper 902
Abstract: 
In this paper, we examine the macroeconomic effects of alternative fiscal consolidation policies in the New Area-Wide Model (NAWM), a two-country open-economy model of the euro area developed at the European Central Bank (cf. Coenen et al., 2007). We model fiscal consolidation as a permanent reduction in the targeted government debt-to-output ratio and analyse both expenditure and revenue-based policies that are implemented by means of simple fiscal feedback rules. We find that fiscal consolidation has positive long-run effects on key macroeconomic aggregates such as output and consumption, notably when the resulting improvement in the budgetary position is used to lower distortionary taxes. At the same time, fiscal consolidation gives rise to noticeable short-run adjustment costs in contrast to what the literature on expansionary fiscal consolidations suggests. Moreover, depending on the fiscal instrument used, fiscal consolidation may have pronounced distributional effects.
Subjects: 
euro area
fiscal consolidation
Fiscal Policy
Keywords: DSGE modelling
limited asset-market participation
JEL: 
E32
E62
Document Type: 
Working Paper

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