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When is Austerity Ineffective?

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  • L. Marattin

Abstract

This paper offers a formal analysis of the relationship between changes in government primary balance and debt-to-GDP ratio. it establishes the conditions under which a fiscal consolidation increases - instead of decreasing - the stock of government liabilities relative to aggregate output. A crucial role is played by the relationship between the elasticities of average cost of debt and nominal output to primary balance: while the former depends on debt maturity and risk premia dynamics, the latter relates to the well-known controversy on the size of government spending multipliers. The paper shows an application to the ongoing fiscal consolidation process in the Eurozone.

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Bibliographic Info

Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number wp880.

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Date of creation: May 2013
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Handle: RePEc:bol:bodewp:wp880

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  1. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," IMF Working Papers 13/1, International Monetary Fund.
  2. Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
  3. Luigi Marattin & Massimiliano Marzo, 2009. "A Note on the (Un)Pleasant Arithmetic of Fiscal Policy: The Case of Italian Public Debt," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 38(3), pages 169-183, November.
  4. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
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