The macroeconomic effects of the European Monetary Union's fiscal consolidation from 2011 to 2013

with Christian Schoder, Vienna University of Economics and Businessand and Jan Strasky, Organisation for Economic Co-operation and Development (OECD).

 

Venue: Board Room - Central Bank of Ireland

Time: 18 February 2015 at 14.30

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Link to presentation

Abstract

We explore the impact of the fiscal consolidation pursued by the Euro Area between 2011 and 2013 by employing versions of two DSGE models developed for fiscal policy analysis by the ECB (the New Area Wide Model) and the European Commission (QUEST III). Our analysis takes into account that monetary policy was constrained by the zero lower bound. It turns out that if the consolidation measures are credibly permanent, the fiscal consolidation caused only a weak decline in GDP compared to the magnitude of the fiscal consolidation, and the government debt-to-GDP ratio quickly falls below the non-consolidation baseline. Allowing for limited fiscal credibility increases the fiscal consolidations effect on GDP. For plausibly calibrated values of the share of liquidity constrained households and in the presence of a financial accelerator along the lines of Bernanke et al. (1999), the fiscal consolidation increases the government debt-to-GDP ratio for four years or more relative to a non-consolidation baseline.