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The Challenge of Debt Reduction during Fiscal Consolidation
Author:
Luc Eyraud
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Series:
IMF Working Papers
Volume/Issue:
Volume 2013: Issue 067
Language:
English
Publication Date:
08 Mar 2013
DOI:
https://doi.org/10.5089/9781475553864.001
ISBN:
9781475553864
ISSN:
1018-5941
Pages:
36
Keywords:
WP; debt ratio; debt ratio increase; debt ratio fluctuation; fiscal consolidation; fiscal multipliers; public debt; debt ratio decline; debt ratio response; public debt debt ratio; Fiscal stance; Europe; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Studies suggest that fiscal multipliers are currently high in many advanced economies. One important implication is that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output. Although this effect is not long-lasting and debt eventually declines, it could be an issue if financial markets focus on the short-term behavior of the debt ratio, or if country authorities engage in repeated rounds of tightening in an effort to get the debt ratio to converge to the official target. We discuss whether these problems could be addressed by setting and monitoring debt targets in cyclically-adjusted terms.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund