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This paper uses a structural multi-country model to assess the impact of fiscal consolidation measures undertaken in 2011-13 in the EA periphery and core.
The simulations assume 'crisis' conditions prevailing (high share of constrained households, ZLB). The GDP effects depend crucially on the composition of the consolidation and on how quickly expectations are affected. Expenditure-based consolidations have larger impact multipliers than revenue-based consolidations. Average multipliers for domestic fiscal shocks range from 0.5 and 1, depending on the degree of openness. But spillovers of fiscal consolidations are large, with both the demand channel and the competitiveness channel adding to the negative GDP effects.
Higher risk premia add further to the negative GDP effects. Spillovers from consolidations in Germany and core EA have worsened the overall economic situation. A temporary fiscal stimulus in surplus countries can boost output and help reduce their current account surpluses. The improvement in current account deficits in the periphery is however small.
Paper by EU economist backs austerity’s critics - further reporting © WSJ