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Economics

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Economics

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Economics

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In many OECD countries debt has soared to levels threatening fiscal sustainability, necessitating its reduction over the medium to longer term. This paper uses stylised simulations in a small, calibrated macroeconomic model which features endogenous interactions between fiscal policy, growth and financial markets. Simulations are done for a hypothetical economy, reflecting key characteristics of fiscally stressed OECD countries. Given the assumed objective to stabilise debt at a 60% of GDP target within 20 years, a consolidation path is chosen by maximising cumulative GDP growth and minimising cumulative squared output gaps. The simulations highlight four issues. First, lowering the debt-to-GDP ratio within a finite horizon requires big initial consolidation which can be largely unwound if debt is to be stabilised at a lower level. Second, some frontloading of the adjustment turns out to be optimal in case of an interest rate shock. Third, debt reduction with high fiscal multipliers, hysteresis effects and adverse market reactions involves protracted large negative output gaps and deflation. This stresses the importance of selecting reasonable fiscal targets consistent with market conditions. Fourth, delaying the attainment of the debt target by two years has generally little implications for initial consolidation, though under adverse conditions this would result in much higher debt and slower growth.

Economics

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Uncertainty is inherent to forecasting and assessing the uncertainty surrounding a point forecast is as important as the forecast itself. Following Cornec (2010), a method to assess the uncertainty around the indicator models used at OECD to forecast GDP growth of the six largest member countries is developed, using quantile regressions to construct a probability distribution of future GDP, as opposed to mean point forecasts. This approach allows uncertainty to be assessed conditionally on the current state of the economy and is totally model based and judgement free. The quality of the computed distributions is tested against other approaches to measuring forecast uncertainty and a set of uncertainty indicators is constructed in order to help exploiting the most helpful information.

Economics