The macroeconomics of fiscal consolidations in a Monetary Union: the case of Italy

Our main results are: (1) reducing tax distortions would entail significant welfare gains; (2) among expenditures, it is preferable to cut purchases of good and services or public employment than transfers to households; (3) it is preferable to cut taxes and expenditures at the same time: tax cuts more than compensate for the welfare costs of reducing expenditures; (4) cutting taxes immediately rather than with a delay entails only a negligible slowdown in the pace of public debt reduction and might deliver a higher level of welfare during the transition.