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The "Austerity Myth": Gain Without Pain?

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  • Roberto Perotti

Abstract

As governments around the world contemplate slashing budget deficits, the “expansionary fiscal consolidation hypothesis” 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 – Denmark and Ireland – undertaken under fixed exchange rates (the most relevant case for many Eurozone countries today) and two – 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 “expansionary fiscal consolidations” hypothesis.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17571.

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Date of creation: Nov 2011
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Publication status: published as The "Austerity Myth": Gain without Pain? , Roberto Perotti. in Fiscal Policy after the Financial Crisis , Alesina and Giavazzi. 2013
Handle: RePEc:nbr:nberwo:17571

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  1. Stéphanie Guichard & Mike Kennedy & Eckhard Wurzel & Christophe André, 2007. "What Promotes Fiscal Consolidation: OECD Country Experiences," OECD Economics Department Working Papers 553, OECD Publishing.
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  1. Scene dalla vita di provincia: prefazione
    by Alberto Bagnai in Goofynomics on 2013-06-27 08:04:00
  2. The Flawed Origins of Expansionary Austerity
    by Jeffrey Frankel in Project Syndicate on 2013-05-20 15:20:13
  3. On Whose Research is the Case for Austerity Mistakenly Based?
    by jfrankel in Jeff Frankels Weblog on 2013-05-20 20:32:55
  4. Wonkbook: Could the scandals help immigration reform?
    by Ezra Klein, Evan Soltas in Ezra Klein's Wonkblog on 2013-05-21 12:45:29
  5. Produttività (again)
    by Alberto Bagnai in Goofynomics on 2013-06-03 12:12:00
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