The Unassuming Economist

From a paper by François Langot, Jocelyn Maillard, Selma Malmberg, Fabien Tripier, and Jean-Olivier Hairault:

“This paper evaluates different fiscal consolidation policies using a Heterogeneous-Agent New-
Keynesian (HANK) model. Three key results emerge. First, the effectiveness of fiscal consolidation
improves markedly when implemented through a fiscal rule rather than resulting from
a series of discretionary decisions: for the same level of expenditure cuts, the reduction in the
debt-to-GDP ratio is larger, and the uncertainty surrounding debt forecasts is lower. Second, it
is more efficient to use household transfers as an instrument than public consumption. Third, a
significant reduction in the debt-to-GDP ratio can be achieved without penalizing GDP growth
or exacerbating inequalities if the government drastically reduces social insurance-based transfers
while increasing social assistance transfers. These results are based on an original stochastic
debt-sustainability analysis using a HANK model, which provides: (i) the projected path of the
future debt-to-GDP ratio for a given policy, conditional on a particular business cycle episode,
and (ii) the full distribution of future debt-to-GDP ratios, thereby highlighting the policy’s
benefits in reducing the risk of a public debt increase under adverse economic conditions. Evaluations
are based on the French economy, which has committed to lowering it in order to comply
with the European Treaty.”