Government Debt, Dollarization, and the Output Effect of Fiscal Consolidations

Abstract

The output effect of fiscal consolidations when government debt is at high levels has been at the core of economic policy discussions in the aftermath of the global financial crisis. This note shows that what matters for the effect of fiscal consolidation on output is not only the level of government debt but also the level of risk that stems from it. The currency composition of debt and the spillover effects of risk on the corporate sector are critical as well.