Fiscal consolidations in a low inflation environment: pay cuts versus lost jobs

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dc.contributor.author Bandeira, Guilherme
dc.contributor.author Pappa, Evi
dc.contributor.author Sajedi, Rana
dc.contributor.author Vella, Eugenia
dc.date.accessioned 2022-05-11T14:27:15Z
dc.date.available 2022-05-11T14:27:15Z
dc.date.issued 2018-06-01
dc.identifier.bibliographicCitation Bandeira, G., Pappa, E., Sajedi, R. & Vella, E. (2018). Fiscal consolidations in a low inflation environment: pay cuts versus lost jobs. International Journal of Central Banking, 14 (3), pp. 7-53
dc.identifier.issn 1815-4654
dc.identifier.uri http://hdl.handle.net/10016/34769
dc.description.abstract We construct a model of a monetary union to study fiscal consolidation in the periphery of the euro area, through cuts in public-sector wages or hiring when the nominal interest rate is constrained at its lower bound. Consolidation induces a positive wealth effect that increases demand, as well as a reallocation of workers towards the private sector, which together boost private activity. However, in a low-inflation environment, demand is suppressed and the private sector is not able to absorb the additional workers. Comparing the two instruments, cuts in public hiring increase unemployment persistently in this environment, while wage cuts can reduce it. Regions with higher mobility of labor between the two sectors are able to consolidate more effectively. Price flexibility is also key at the zero lower bound: for a higher degree of price rigidity in the periphery, consolidation becomes harder to achieve. Consolidations can be self-defeating when the public good is productive.
dc.description.sponsorship E. Pappa acknowledges the support of FCT as well as the ADEMU project, funded by the European Union's Horizon 2020 Program under grant agreement No. 649396. The views expressed here in no way reflect those of the Bank of England or the Bank of Spain
dc.language.iso eng
dc.publisher Central Banking
dc.rights © 2018 by the Association of the International Journal of Central Banking. All rights reserved.
dc.subject.other Fiscal consolidation
dc.subject.other Public wage bill
dc.subject.other Zero lower bound
dc.title Fiscal consolidations in a low inflation environment: pay cuts versus lost jobs
dc.type article
dc.relation.publisherversion https://www.ijcb.org/journal/ijcb18q2a1.htm
dc.subject.jel E32
dc.subject.jel E62
dc.subject.eciencia Economía
dc.subject.eciencia Empresa
dc.rights.accessRights openAccess
dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
dc.type.version publishedVersion
dc.identifier.publicationfirstpage 1
dc.identifier.publicationissue 3
dc.identifier.publicationlastpage 47
dc.identifier.publicationtitle International Journal of Central Banking
dc.identifier.publicationvolume 14
dc.identifier.uxxi AR/0000029321
dc.contributor.funder European Commission
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