The "Austerity Myth": Gain without Pain?
In: Fiscal Policy after the Financial Crisis
AbstractAs governments around the world contemplate slashing budget deficits, the â€œexpansionary fiscal consolidation hypothesisâ€ is back in vogue. I argue that, as a statement about the short run, it should be taken with caution. I present four detailed case studies, two â€“ Denmark and Ireland â€“ undertaken under fixed exchange rates (the most relevant case for many Eurozone countries today) and two â€“ Finland and Sweden - after floating the currency. All four episodes were associated with an expansion; but only in Denmark the driver of growth was internal demand. However, after three years a long slump set in as the economy lost competitiveness. In all the others for a long time the main driver of growth was exports. In Ireland this occurred because the sterling coincidentally appreciated. In Finland and Sweden the currency experienced an extremely large depreciation after floating. In all consolidations interest rate fell fast, and wage moderation played a key role in generating a gain competitiveness and a decline in interest rates. These results cast doubt on at least some versions of the â€œexpansionary fiscal consolidationsâ€ hypothesis.
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Other versions of this item:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- StÃ©phanie Guichard & Mike Kennedy & Eckhard Wurzel & Christophe AndrÃ©, 2007. "What Promotes Fiscal Consolidation: OECD Country Experiences," OECD Economics Department Working Papers 553, OECD Publishing.
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