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- Title
The Modality of Fiscal Consolidation and Current Account Adjustment.
- Authors
Adam, Antonis; Moutos, Thomas
- Abstract
In this article, we argue that supply-side adjustments (i.e. the reallocation of productive resources between the traded and non-traded sectors) can be an important determinant of the output costs of current account adjustment. The argument relies on the fact that tax evasion is more prevalent in the non-traded sector, which is dominated by services and the self-employed. Heavy reliance on tax-based fiscal consolidations induces a reallocation of economic activity towards the non-traded sector, thus requiring a larger decline in domestic absorption (and output) per unit of improvement in the current account balance. Using International Monetary Fund data for the period 1980-2011, we find that budget consolidations that relied more on tax increases than on spending decreases were associated with larger output costs per unit of current account improvement.
- Subjects
BALANCE of payments; NONTRADED goods; TAX evasion; ECONOMIC activity; INTERNATIONAL Monetary Fund
- Publication
CESifo Economic Studies, 2017, Vol 63, Issue 2, p162
- ISSN
1610-241X
- Publication type
Article
- DOI
10.1093/cesifo/ifw020