In many OECD countries debt has soared to levels threatening fiscal sustainability, necessitating its
reduction over the medium to longer term. This paper uses stylised simulations in a small, calibrated
macroeconomic model which features endogenous interactions between fiscal policy, growth and financial
markets. Simulations are done for a hypothetical economy, reflecting key characteristics of fiscally stressed
OECD countries. Given the assumed objective to stabilise debt at a 60% of GDP target within 20 years, a
consolidation path is chosen by maximising cumulative GDP growth and minimising cumulative squared output
gaps. The simulations highlight four issues. First, lowering the debt-to-GDP ratio within a finite horizon requires
big initial consolidation which can be largely unwound if debt is to be stabilised at a lower level. Second, some
frontloading of the adjustment turns out to be optimal in case of an interest rate shock. Third, debt reduction with
high fiscal multipliers, hysteresis effects and adverse market reactions involves protracted large negative output
gaps and deflation. This stresses the importance of selecting reasonable fiscal targets consistent with market
conditions. Fourth, delaying the attainment of the debt target by two years has generally little implications for
initial consolidation, though under adverse conditions this would result in much higher debt and slower growth.
