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Long-term effects of fiscal stimulus and austerity in Europe

Author

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  • Sebastian Gechert
  • Gustav A. Horn
  • Christoph Paetz

Abstract

We analyze whether there are negative (positive) long-term effects of austerity measures (stimulus measures) on potential output growth. Based on the approach of Blanchard and Leigh (2013) and Fatás and Summers (2016) and using a novel dataset of narratively identified fiscal policy shocks, we estimate the impact of these shocks on potential output. We robustly find strong and persistent long-run multiplier effects for most European Countries in the early years after the financial crisis and subsequent Euro Area crisis. We conclude that early stimulus was beneficial even in the long-run, while the subsequent turn to austerity was badly timed and thus not only deepened the crisis but caused evitable hysteresis effects.

Suggested Citation

  • Sebastian Gechert & Gustav A. Horn & Christoph Paetz, 2017. "Long-term effects of fiscal stimulus and austerity in Europe," IMK Working Paper 179-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:wpaper:179-2017
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    Keywords

    Fiscal Consolidation; Fiscal Multipliers; Forecast Errors; Hysteresis;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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