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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.
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Non-Keynesian Effects of Fiscal Consolidation
An Analysis with an Estimated DSGE Model for the Hungarian Economy
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- Szilárd Benk1, Zoltán M. Jakab1
- Author Affiliations
- 1: OECD, France
- 09 Mar 2012
- Bibliographic information
Using an estimated DSGE model for Hungary, the paper identifies the possible non-Keynesian channels through which a fiscal consolidation may manifest as expansionary. Simulations show that fiscal consolidation policies are typically contractionary. Nevertheless, taking into account some specific features of the Hungarian economy, there is a possibility that expansionary effects arise. These effects may take the form of a drop in interest rate risk premium or favourable balance sheet effects through the appreciation of the currency. However, the credibility of fiscal consolidation is key in achieving positive output effects. A non-credible consolidation is unlikely to expand output, regardless of the assumptions regarding the specific features of the economy, and regardless of the composition of a consolidation package.
- non-Keynesian effects, taxation, fiscal consolidation, government expenditure, DSGE model
- JEL Classification:
- E27: Macroeconomics and Monetary Economics / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy / Forecasting and Simulation: Models and Applications
- E62: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Fiscal Policy
- H30: Public Economics / Fiscal Policies and Behavior of Economic Agents / General
- H50: Public Economics / National Government Expenditures and Related Policies / General