How costly are borrowing costs?: an analysis of alternative fiscal policies during crises
Gümüş, İnci (2015) How costly are borrowing costs?: an analysis of alternative fiscal policies during crises. (Accepted/In Press)
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Financial crises lead to substantial declines in output and consumption in emerging market economies. The fact that fi scal policy is procyclical in these countries shows that the effects of a crisis are exacerbated by spending cuts and tax increases, which are usually attributed to borrowing constraints that they face in bad times. This paper quantitatively analyzes the costs of reduced borrowing in crisis episodes, by studying the effects of expansionary fi scal policies that would have been possible to implement, had the government been able to borrow more. The model shows that a proportional 25% reduction of taxes on labor income, capital income and consumption during the 1997 Korean crisis would have required an additional borrowing of 4.10% of GDP, while increasing output and consumption by 5.23 and 5.92 percentage points, respectively. When the effects of each tax rate are analyzed separately, labor income tax reduction turns out to be more effective than the other policies.
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