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Fiscal Consolidation: What Are the Breakeven Fiscal Multipliers?

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  • Jarmila Botev
  • Annabelle Mourougane

Abstract

This article derives time-varying threshold multipliers for G7 countries and the euro area, above which consolidation will be self-defeating (that is, leading to an increase rather than a decrease in the debt-to-GDP ratio). Simulations suggest that these thresholds have declined since the financial crisis. In addition to the length of the consolidation period, and the pace of consolidation, the initial level of public debt would be the main factor affecting these multipliers. Results are robust to alternative calibration of the model and suggest that it may be advisable to delay consolidation in countries where the recovery is still fragile, as the conditions for fiscal consolidation not to be self-defeating are stricter than those prevailing in the pre-crisis period. Consolidation packages should also rely on measures where multipliers are the lowest to ensure that threshold multipliers are not exceeded.

Suggested Citation

  • Jarmila Botev & Annabelle Mourougane, 2017. "Fiscal Consolidation: What Are the Breakeven Fiscal Multipliers?," CESifo Economic Studies, CESifo Group, vol. 63(3), pages 295-316.
    • Handle: RePEc:oup:cesifo:v:63:y:2017:i:3:p:295-316.
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    1. Annabelle Mourougane & Jarmila Botev & Jean-Marc Fournier & Nigel Pain & Elena Rusticelli, 2016. "Can an Increase in Public Investment Sustainably Lift Economic Growth?," OECD Economics Department Working Papers 1351, OECD Publishing.

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    Keywords

    fiscal policy;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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