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Ali Alichi, Mr. Ippei Shibata, and Kadir Tanyeri
Government debt in many small states has risen beyond sustainable levels and some governments are considering fiscal consolidation. This paper estimates fiscal policy multipliers for small states using two distinct models: an empirical forecast error model with data from 23 small states across the world; and a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to a hypothetical small state’s economy. The results suggest that fiscal policy using government current primary spending is ineffective, but using government investment is very potent in small states in affecting the level of their GDP over the medium term. These results are robust to different model specifications and characteristics of small states. Inability to affect GDP using current primary spending could be frustrating for policymakers when an expansionary policy is needed, but encouraging at the current juncture when many governments are considering fiscal consolidation. For the short term, however, multipliers for government current primary spending are larger and affected by imports as share of GDP, level of government debt, and position of the economy in the business cycle, among other factors.
Kodjovi M. Eklou and Mamour Fall
Do discretionary spending cuts and tax increases hurt social well-being? To answer this question, we combine subjective well-being data covering over half a million of individuals across 13 European countries, with macroeconomic data on fiscal consolidations. We find that fiscal consolidations reduce individual well-being in the short run, especially when they are based on spending cuts. In addition, we show that accompanying monetary and exchange rate policies (disinflation, depreciations and the liberalization of capital flows) mitigate the well-being cost of fiscal consolidations. Finally, we investigate the well-being consequences of the two well-knowns expansionary fiscal consolidations episodes taking place in the 80s (in Denmark and Ireland). We find that even expansionary fiscal consolidations can have well-being costs. Our results may therefore shed some light on why some governments may choose to consolidate through taxes even at the cost of economic growth. Indeed, if spending cuts are to generate a large well-being loss, they can trigger an opposition and protest against a fiscal consolidation plan and hence making it politically costly.
Kodjovi M. Eklou and Mamour Fall

for potential mitigating policies and second, we investigate the well-being consequences of these two expansionary fiscal consolidations that took place in Denmark and in Ireland. To the best of our knowledge this paper is the first to investigate the well-being cost of fiscal consolidations. Our empirical analysis combines subjective well-being data covering over a half million of individuals across 13 European countries, with macroeconomic data on fiscal consolidations over the period 1980–2007. We rely on the exogeneity of fiscal consolidations identified with

Ali Alichi, Mr. Ippei Shibata, and Kadir Tanyeri

. Small States: Composition of Government Debt: Domestic and External 4. Small States: Government Expenditure and Tax Revenues 5. Small States: Government Expenditure: Consumption vs. Investment 6. Response of GDP to +1 Percent Shock in Government Consumption 7. Response of GDP to +1 Percent of GDP Shock in Government Investment 8. GDP Cost of Fiscal Consolidation of 1 Percent of GDP 9. GIMF Model Country Setup 10. GDP Cost of Fiscal Consolidation of 1 Percent of GDP 11a. Permanent Consolidation of 1 Percent of GDP Using Lower Government Consumption

Mr. Damiano Sandri
The paper presents a tractable model to understand how international financial institutions (IFIs) should deal with the sovereign debt crisis of a systemic country, in which case private creditors' bail-ins entail international spillovers. Besides lending to the country up to its borrowing capacity, IFIs face the difficult issue of how to address the remaining financing needs with a combination of fiscal consolidation, bail-ins and possibly official transfers. To maximize social welfare, IFIs should differentiate the policy mix depending on the strength of spillovers. In particular, stronger spillovers call for smaller bail-ins and greater fiscal consolidation. Furthermore, to avoid requiring excessive fiscal consolidation, IFIs should provide highly systemic countries with official transfers. To limit the moral hazard consequences of transfers, it is important that IFIs operate under a predetermined crisis-resolution framework that ensures commitment.
International Monetary Fund. Western Hemisphere Dept.

) Sources: WEO and IMF Staff Estimations. 13. The results are consistent with findings in other studies . The GDP cost of fiscal consolidations across different models—i) the current empirical study, ii) IMF Global Integrated monetary and Fiscal Model (GIMF)’s model, and iii) IMF’s 2018 Regional Economic Outlook: Western Hemisphere Department (REO WHD)’s estimates (2018) all show that public investment has a larger growth impact than current spending. 5 The growth impacts of government investment are much higher than those of the current spending. GDP Cost of

Mr. George Kopits, Mr. Helge Berger, and Mr. Istvan P Szekely
In recent years, fiscal performance in Central Europe has steadily deteriorated, in contrast to the improvement in the Baltics. This paper explores the determinants of such differences among countries slated for EU accession. Regression estimates suggest that economic and institutional fundamentals do not provide a full explanation. An alternative explanation lies in the political economy of the accession process, and a game-theoretic model illustrates why a country with a stronger bargaining position might have an incentive to deviate from convergence to the Maastricht criteria. The model generates alternative fiscal policy regimes-allowing for regime shifts-depending on country characteristics and EU policies.
Mr. Dirk V Muir
With fiscal adjustment proceeding quickly in Bulgaria and given the weak economic growth environment, there is keen interest in making the budget composition more growth friendly. This paper quantifies the short-term impact of fiscal policy on economic activity in Bulgaria using econometric and model-based approaches. While fiscal multipliers have been modest in the past, as can be expected in a small open emerging economy, the effect on output is not independent of the speed of adjustment and the specific consolidation measures used. The impact of fiscal policy on economic activity is larger in downturns than in expansions and capital spending and direct taxes are associated with the largest effects on output, while non-targeted government transfers and indirect taxes are associated with a smaller impact. The results suggest that increased capital spending financed by higher indirect tax revenue collections through base broadening has sizeable growth effects over the medium and long-term.