Post-Crisis Recovery: When Does Increased Fiscal Discipline Work?

Author/Editor:

Pritha Mitra

Publication Date:

October 13, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Emerging market financial crises during the late 1990s were marked by sudden withdrawals of funds by foreign creditors, resulting in production declines. The IMF favored positive signals to potential foreign creditors and initially recommended disciplined fiscal policy during the height of crisis, countering standard Keynesian recommendations of expansionary fiscal stimulus. This paper formulates an open-economy general equilibrium model for resolving this policy conundrum and analyzing the impact of disciplined fiscal policy on post-crisis recovery. The model demonstrates via simulations that disciplined fiscal policy will improve (worsen) post-crisis recovery in the presence (absence) of appropriately defined production flexibility.

Series:

Working Paper No. 2006/219

Subject:

Collateral Financial institutions Fiscal policy Labor Public debt Revenue administration

English

Publication Date:

October 13, 2006

ISBN/ISSN:

9781451864793/1018-5941

Stock No:

WPIEA2006219

Pages:

43

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