Fiscal Consolidation and its Cross-Country Effects

65 Pages Posted: 25 Aug 2016

See all articles by Apostolis Philippopoulos

Apostolis Philippopoulos

Athens University of Economics and Business - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); University of Essex

Petros Varthalitis

Athens University of Economics and Business

Vanghelis Vassilatos

Athens University of Economics and Business - Department of Economics

Date Written: August 02, 2016

Abstract

We build a new Keynesian DSGE model consisting of two heterogeneous countries participating in a monetary union. We study how public debt consolidation in a country with high debt (like Italy) affects welfare in a country with solid public finances (like Germany). Our results show that debt consolidation in the high-debt country benefits the country with solid public finances over all time horizons. By constrast, in Italy, namely the country that takes the consolidation measures, such a policy is productive only in the medium and long term. Thus, although there is a conflict of national interests in shorter horizons, there is a common interest in the medium and long term. All this is with optimized feedback policy rules. By contrast, debt consolidation is welfare inferior to non-consolidation for both countries and all the time, if it is implemented in an ad hoc way, like an increase in income taxes. Therefore, the policy mix is important.

Keywords: debt consolidation, country spillovers, feedback policy rules, new Keynesian

JEL Classification: E600, F300, H600

Suggested Citation

Philippopoulos, Apostolis and Varthalitis, Petros and Vassilatos, Vanghelis, Fiscal Consolidation and its Cross-Country Effects (August 02, 2016). CESifo Working Paper Series No. 6012, Available at SSRN: https://ssrn.com/abstract=2828617 or http://dx.doi.org/10.2139/ssrn.2828617

Apostolis Philippopoulos (Contact Author)

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+301 322 3187 (Phone)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Petros Varthalitis

Athens University of Economics and Business ( email )

Vanghelis Vassilatos

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
51
Abstract Views
415
Rank
693,387
PlumX Metrics