THE CHOICE OF AN APPROACH TO FISCAL CONSOLIDATION
THE CHOICE OF AN APPROACH TO FISCAL CONSOLIDATION

Summary/Abstract: Addressing the fiscal imbalances requires monitoring of debt dynamics. There exists a country-specific debt threshold which renders the relation economic growth– public debt negative. The fiscal consolidation is the appropriate policy to prevent the economy from surpassing the critical debt threshold. However, the nonlinear fiscal effects due to the countercyclical fiscal multiplier raise the question about the adequacy of such policy through the business cycle. The paper proposes a direct way to compute the Keynesian multiplier which can then be integrated into the framework for debt analysis. Choosing the right timing for implementation of fiscal consolidation by considering the debt-to-GDP ratio and the multiplier value is essential for the successful stabilization of the public finances. To that end, a conceptual criterion is introduced to determine the urgency of fiscal consolidation in Bulgaria.

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