Fiscal consolidations boost consumption and reduce public debt without causing pain.
Fiscal consolidations can have negative effects on households with limited access to financial markets, causing short-term welfare losses. By adjusting taxes or providing temporary public transfers, public debt can be reduced while boosting consumption for constrained households. Implementing an interest rate rule that reacts to both inflation and the output gap can help stabilize the economy. This policy can lead to better control of inflation and limit deflationary pressures.