Public debt, sovereign spreads and the unpleasant arithmetic of fiscal consolidations

In response to severe fiscal consolidation policies implemented after the Great Recession and euro area sovereign debt crisis, many have questioned effectiveness of consolidations in reducing burden public debt. This paper revisits this fundamental policy debate qualitatively quantitatively, studying conditions under which primary budget balance changes can successfully reduce government debt-to-GDP ratios. We first illustrate these through a partial equilibrium setting. then investigate quantitatively using medium-scale New Keynesian DSGE model calibrated on periphery countries area. The analysis highlights critical role spreads driving dynamics following restrictive shock. Fiscal turn out even for fairly low elasticities variables. However, their is moderate varies crucially with initial spread level, degree monetary accommodation, responsiveness market investors economic fundamentals.