DP14072 Austerity and Public debt Dynamics
This paper studies the impact of multi-year fiscal consolidation plans
on public debt dynamics. Studying the dynamic impact of narratively identified fiscal adjustment plans we find that tax based adjustments
result in significant slowdowns of output and inflation but have almost
no effect on the debt GDP ratio over a short to medium-term horizon. Spending
cuts have instead milder recessionary effects,
but contribute to a sustained reduction in the debt GDP ratio. Extending
our model to study non-linearities in the dynamics related to the
business-cycle and the public debt to GDP ratio, we find that the
heterogeneous impact of tax-based and expenditure-based plans on debt
mainly emerges mostly in recessions and when debt is increasing rapidly.
