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Expansionary Fiscal Consolidations: Theoretical Underpinnings and their Implications for the Eurozone

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  • Pasquale Foresti
  • Ugo Marani

Abstract

This paper deals with theoretical foundations justifying alleged expansionary effects of fiscal consolidations. In some European countries there have been episodes of fiscal retrenchments followed by an increase in output (Sweden, Ireland, Denmark, and Finland). These have been taken as a starting point for theories advocating, contrary to the Keynesian tradition, the possibility of a negative sign of the fiscal multiplier. We show that expansionary fiscal consolidations can occur under extreme circumstances: they are not the result of pure fiscal policies, but rather they result from a policy mix in which the central bank's behaviour is crucial. On the basis of this evidence we discuss why, given the current economic scenario, immediate austerity cannot be a plausible way out from the recession in the euro-area countries.

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  • Pasquale Foresti & Ugo Marani, 2014. "Expansionary Fiscal Consolidations: Theoretical Underpinnings and their Implications for the Eurozone," Contributions to Political Economy, Cambridge Political Economy Society, vol. 33(1), pages 19-33.
    • Handle: RePEc:oup:copoec:v:33:y:2014:i:1:p:19-33.
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    File URL: http://hdl.handle.net/10.1093/cpe/bzu007
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    Cited by:

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    2. Stefano di Bucchianico, 2019. "A bit of Keynesian debt-to-GDP arithmetic for deficit-capped countries," Bulletin of Political Economy, Bulletin of Political Economy, vol. 13(1), pages 55-83, June.
    3. Alberto Botta, 2020. "The short- and long-run inconsistency of the expansionary austerity theory: a post-Keynesian/evolutionist critique," Journal of Evolutionary Economics, Springer, vol. 30(1), pages 143-177, January.
    4. Jesús Ferreiro & Catalina Gálvez & Carmen Gómez Author-Email: carmen.gomez@ehu.eus & Ana González, 2016. "Bank Rescues and Fiscal Policy in the European Union during the Great Recession," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 63(2), pages 211-230, April.
    5. Christian Breuer, 2019. "State Expansionary Austerity and Reverse Causality: A Critique of the Conventional Approach," Working Papers Series 98, Institute for New Economic Thinking.
    6. Roberto Tamborini & Matteo Tomaselli, 2020. "When does public debt impair economic growth? A literature review in search of a theory," DEM Working Papers 2020/7, Department of Economics and Management.
    7. Sébastien Charles & Thomas Dallery & Jonathan Marie, 2015. "Why the Keynesian Multiplier Increases During Hard Times: A Theoretical Explanation Based on Rentiers' Saving Behaviour," Metroeconomica, Wiley Blackwell, vol. 66(3), pages 451-473, July.
    8. Jesús Ferreiro & Catalina Gálvez & Ana González, 2015. "Fiscal Policies in the European Union during the Crisis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(2), pages 131-155, June.
    9. George D. Demopoulos & Nicholas A. Yannacopoulos, 2015. "Conditions that may invalidate the prediction of the expansionary austerity policies," Working Papers 201502, Athens University Of Economics and Business, Department of Economics.
    10. Alberto Botta & Daniele Tori, 2015. "A critique to the expansionary austerity: Theoretical weaknesses and empirical counter evidence," Working Papers PKWP1511, Post Keynesian Economics Society (PKES).
    11. Lara Greta MERLING & Alexandru VLADOI, 2022. "Fiscal consolidation and public debt in the European Union: Reevaluating the relationship," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(631), S), pages 39-48, Summer.
    12. Michal Jurek & Pawel Marszalek, 2015. "Policy alternatives for the relationship between ECB monetary and financial policies and new member states," Working papers wpaper112, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.

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