Output effects of fiscal consolidations

Carlo Favero, Francesco Giavazzi 07 September 2012

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The austerity debate turns on a central economic logic – how does fiscal policy affect output? This is a tricky question since declining output can affect fiscal policy just as much as fiscal policy can affect growth. Governments, after all, don’t make policy in a vacuum.

The key to estimating the effects of fiscal policy on output is this identifying shifts in fiscal policy that are 'exogenous'. Policy changes that are not a response to the state of output – as would be the case, for instance, of a fiscal expansion induced by a fall in output.

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Topics:  Global crisis Macroeconomic policy

Tags:  fiscal policy, fiscal crises, austerity

Fiscal consolidation and reforms: Substitutes, not complements

Coen Teulings 13 September 2012

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Many OECD countries suffer from high sovereign debts. Sooner or later, this problem must be addressed. That will require some form of fiscal retrenchment.

Quite often the fiscal problems are due to market rigidities, barriers to entry, and distortive tax systems. A programme of reform must therefore include both fiscal consolidation and institutional reform to enhance future growth. Growth and the larger tax base that goes with it provides the best prospect for solving the fiscal problems.

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Topics:  Macroeconomic policy Taxation

Tags:  Institutional reform, fiscal crises, Fiscal retrenchment, austerity

Rethinking austerity: Introducing a new Vox eCollection

Giancarlo Corsetti 23 June 2012

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Even as the first Vox eCollection is going online, the global economy is being shaken by events ranging from a Chinese economic slowdown to the possibility of a delayed Greek Eurozone exit. The fact that such events can be viewed as dangerous for the world economy as a whole is a powerful testimony to how profoundly fragile are macroeconomies and financial sectors in the mature economies – four and half years after the eruption of the global crisis.

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Topics:  Macroeconomic policy

Tags:  fiscal crises, austerity

A tale of two overhangs: The nexus of financial sector and sovereign credit risks

Viral Acharya, Philipp Schnabl, Itamar Drechsler 15 April 2012

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From 2007 to 2010, the Irish public debt-to-GDP ratio rose roughly 20% annually, taking it from among the lowest among OECD countries in 2007 (25%) to among the highest in 2010 (96%). Irish banks had looked increasingly vulnerable in the autumn of 2008 with their credit default swap (CDS) spreads – which is just the cost of buying protection against bond default – having reached a peak (on average across the four largest banks) of over 400 basis points in September 2008.

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Topics:  Global crisis International finance

Tags:  sovereign debt, Bailouts, fiscal crises, Eurozone crisis

What can Europe learn from Sweden? Four lessons for fiscal discipline

Lars Calmfors 12 March 2012

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Several Eurozone countries are currently struggling with acute fiscal crises (eg Corsetti and Müller 2012). At the same time, the new fiscal compact is an attempt to beef up fiscal frameworks for the future. In order to judge both the fiscal consolidation efforts and the reforms, comparisons with economies that have in the past carried through such processes successfully are helpful.

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Topics:  Macroeconomic policy

Tags:  Sweden, fiscal policy, fiscal crises

The ECB’s trillion euro bet

Charles Wyplosz 13 February 2012

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With immense modesty, the President of the ECB Mario Draghi is giving the credit for falling spreads on Eurozone government debt to the courageous reforms announced in a number of countries, especially those where former academic economists act as prime ministers. Oh, how we would love to buy Mario Draghi’s interpretation! While simultaneity is not causality, it is hard not to see a link between the impressive decline in bond spreads and the ECB’s long-term refinancing operations (LTROs).

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Topics:  EU policies Europe's nations and regions

Tags:  ECB, fiscal crises, Eurozone crisis

The unexplained part of public debt

Camila FS Campos, Dany Jaimovich, Ugo Panizza 17 January 2012

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The answer to the question “How do countries get into debt?” seems trivial. The stock of debt is equal to the sum of past budget deficits. Countries accumulate debt whenever they run a budget deficit and reduce their debt when they run a budget surplus.

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Topics:  Macroeconomic policy

Tags:  sovereign debt, fiscal crises

The global saving glut will hold bond yields down

Heleen Mees 08 August 2011

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The saving glut theory has gone out of fashion – unjustly so. In spite of twin financial crises looming on either side of the Atlantic, US Treasury and German Bund yields have declined in recent weeks. This can be explained by not only the dismal economic growth of the US economy in the first semester of 2011, but also the unrelenting build-up in total debt securities outstanding.

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Topics:  Global crisis

Tags:  US, global imbalances, China, global crisis, fiscal crises, Eurozone crisis

Is Greece different? Adjustment difficulties in southern Europe

Daniel Gros, Cinzia Alcidi 22 April 2010

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The Southern members of the Eurozone are often lumped together because they all have overvalued currencies and twin deficits – fiscal and external current account (De Grauwe 2010).

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Topics:  Europe's nations and regions

Tags:  Southern Europe, fiscal crises, Eurozone crisis

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