CAFRAL-SRU Brown Bag Seminar - Fiscal Austerity In Emerging Market Economies
Speaker(s) Pawan Gopalakrishnan, Manager, SRU, Reserve Bank of India Publication CAFRAL Conference room on Mezzanine Floor, Main Building. Reserve Bank of India, Fort, Mumbai 400 001
ABSTRACT

We build a small open economy RBC model with financial frictions to analyze expansionary fiscal consolidations in emerging market economies (EMEs). We calibrate the model to India, which we view as a proto-typical EME. When factor income tax rates are low, a contractionary fiscal shock has an expansionary effect on output. The economy's debt/GDP ratio falls, and tax revenues rise. When factor income tax rates are high, a contractionary fiscal shock has an expansionary effect on output if government spending is valued sufficiently highly relative to private consumption by households in utility. We identify the mechanisms behind these results, and their implications for actual economies undertaking fiscal reforms.