OECD Economics Department Working Papers

ISSN :
1815-1973 (online)
DOI :
10.1787/18151973
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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
 

Fiscal Consolidation: Part 2. Fiscal Multipliers and Fiscal Consolidations You or your institution have access to this content

Authors:
Ray Barrell1, Dawn Holland2, Ian Hurst2
Author Affiliations
  • 1: Brunel University, United Kingdom

  • 2: National Institute of Economic and Social Research, United Kingdom

Publication Date
22 Feb 2012
Bibliographic information
No.:
933
Pages
43
DOI
10.1787/5k9fdf6bs78r-en

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This paper looks at various aspects of fiscal consolidation in 18 OECD economies. The prospects for fiscal consolidation depend upon the problems the country may face with its debt stock, the political will to deal with these problems and on the costs of consolidation. The analysis is based on a series of simulations using the National Institute Global Econometric Model, NiGEM. The properties of the NiGEM model are discussed first. Although the model is estimated it has a strong role for expectations and can be run under different modes of expectations formation. This allows a decomposition of the factors that might affect the results. Temporary and permanent shifts in fiscal policy are assessed as well as the potential impact of fiscal consolidation plans under different monetary and fiscal feedback rules and different modes of expectations formation. If fiscal policy is expected to be tightened in the future, then long rates will fall now, and perhaps even induce a short-term expansion of output. Expansionary fiscal contractions of this sort are rare, however, and none are anticipated with the programmes that are investigated.
Keywords:
fiscal multipliers, rational expectations, large scale structural macro models, budget consolidation in the OECD
JEL Classification:
  • E17: Macroeconomics and Monetary Economics / General Aggregative Models / Forecasting and Simulation: Models and Applications
  • E37: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Forecasting and Simulation: Models and Applications
  • E62: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Fiscal Policy