Debt Reduction, Fiscal Adjustment, and Growth in Credit-Constrained Economies

Emanuele Baldacci, Sanjeev Gupta, Carlos Mulas-Granados
2013 IMF Working Papers  
This paper assesses the effects of fiscal consolidations associated with public debt reduction on medium-term output growth during periods of private debt deleveraging. The analysis covers 107 countries and 79 episodes of public debt reduction driven by discretionary fiscal adjustments during 1980-2012. It shows that expenditure-based, front-loaded fiscal adjustments can dampen growth when there are credit supply restrictions. Instead, fiscal adjustments that are gradual and rely on a mix of
more » ... enue and expenditure measures can support output expansion, while reducing public debt. In this context, protecting public investment is critical for medium-term growth, as is the implementation of supply-side, productivity-enhancing reforms. by participants of two IMF and one Italian Treasury seminars and the 2013 Banca d'Italia conference on public finance in Perugia. The authors wish to thank Ibraheem Mehmood and Haoyu Wang for excellent research assistance. The usual disclaimer applies. 1 This has happened during other periods in history as well: see Rogoff and Reinhart (
doi:10.5089/9781475516500.001 fatcat:4jj2b4w23javfgmq2v4c3oyyhi