“Our findings suggest that in today’s environment, fiscal consolidation is likely to have more negative short term effects than usual. In many economies, central banks can only provide a limited monetary stimulus because interest rates are already near zero.
Moreover, if many countries adjust simultaneously, the output costs are likely to be greater — since not all countries can reduce the value of their currency and increase net exports at the same time.
Our simulations suggest that the contraction in output may be more than twice as large as our baseline estimate when central banks cannot cut interest rates, and when the adjustment is synchronized across all countries. But for economies considered at high risk of sovereign default, short-term negative effects are likely to be smaller.”