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The US Fiscal Consolidation, its impact and policy implications

Chuluunbayar, Delgerjargal (2019): The US Fiscal Consolidation, its impact and policy implications.

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Abstract

High government debt levels - especially among advanced countries including the United States (US) – have prompted calls for fiscal consolidation. US fiscal policy is experiencing considerable debate since its policy decisions influence other countries and the effects of the policy choices have economic consequences for the global economy. Therefore, the paper examines the effect of the US fiscal consolidation for the country as well as the rest of the world and analyses different approaches to determine the best option to the fiscal consolidation. For the choosing optimal policy, it is important to see differences between the short and long-run effects, size and speed of the policy, how much and how fast the policy should be implemented. This paper analyses three simulations using G-Cubed, which is intertemporal general equilibrium model with international trade and finance. From the analysis, there are short-run contractions, however, fiscal consolidation overall positive impact on the US and Non-US countries when the only US is introducing the policy. For policy choose, permanent fiscal consolidation is more favourable than gradual in the short-run. If all countries carry out the same policy, both short and long-run impacts are positive for those countries.

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