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ECONOMIC AND SOCIAL CONSEQUENCES OF DRUG ABUSE AND ILLICIT TRAFFICKING

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With many economies in fiscal consolidation mode, there has been an intense debate about the size of fiscal multipliers. At the same time, activity has disappointed in a number of economies undertaking fiscal consolidation. A natural question therefore is whether forecasters have underestimated fiscal multipliers, that is, the short-term effects of government spending cuts or tax hikes on economic activity. In a box published in the October 2012 World Economic Outlook (WEO; IMF, 2012b), we focused on this issue by regressing the forecast error for real GDP growth on forecasts of fiscal consolidation. Under rational expectations, and assuming.

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