Date: 2010
Type: Working Paper
Debt Consolidation and Fiscal Stabilization of Deep Recessions
Working Paper, EUI ECO, 2010/03
CORSETTI, Giancarlo, KUESTER, Keith, MEIER, André, MÜLLER, Gernot J., Debt Consolidation and Fiscal Stabilization of Deep Recessions, EUI ECO, 2010/03 - https://hdl.handle.net/1814/13223
Retrieved from Cadmus, EUI Research Repository
The global financial crisis of 2008–09 has sent public debt on sharply
higher trajectories. With the economic recovery gradually taking hold, the
focus is now shifting to fiscal “exit” strategies. Medium-term consolidation
efforts are likely to include not only tax increases but also sizeable spending
cuts. Our paper uses a standard new Keynesian model to show that the anticipation
of such medium-term spending cuts generally enhances the expansionary
effect of short-run fiscal stimulus. This conclusion still applies when
monetary policy is constrained by the zero lower bound on policy rates. In
this case, however, the reversal of government spending must not occur too
early on the recovery path, or at least must be suitably gradual.
Cadmus permanent link: https://hdl.handle.net/1814/13223
ISSN: 1725-6704
Series/Number: EUI ECO; 2010/03