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The simple macroeconomics of fiscal austerity: Public debt,deficits and deficit caps

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Author Info

  • Thomas I. Palley

    ()
    (New America Foundation, Washington DC)

Abstract

This paper explores the macroeconomics of fiscal austerity. A binding budget deficit cap makes the economy more volatile by turning the government budget into an automatic destabilizer. Public debt helps maintain aggregate demand (AD) in the presence of a lower price level because a lower price level increases the real value of public interest payments and also has a positive wealth effect. That makes public debt significantly different from private debt. If the economy is subject to a binding deficit cap public debt may no longer stabilize output. This is because increased real interest payments may be matched by spending cuts, giving rise to a negative balanced budget multiplier.

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File URL: http://www.elgaronline.com/abstract/journals/ejeep/9-1/ejeep.2012.01.07.xml
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Bibliographic Info

Article provided by Edward Elgar in its journal Intervention. European Journal of Economics and Economic Policies.

Volume (Year): 9 (2012)
Issue (Month): 1 ()
Pages: 91-108

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Handle: RePEc:elg:ejeepi:v:9:y:2012:i:1:p91-108

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Web page: http://www.elgaronline.com/ejeep

Related research

Keywords: Â fiscal austerity; budget deficit cap; public debt; lower price level;

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