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The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy

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  • Òscar Jordà
  • Alan M. Taylor

Abstract

After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government’s shift to austerity policies in 2010 on subsequent growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19414.

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Date of creation: Sep 2013
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Handle: RePEc:nbr:nberwo:19414

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How to muddy the waters on impact of austerity
    by Mainly Macro in Mainly Macro on 2014-08-01 13:06:00
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Cited by:
  1. Manos Matsaganis & Chrysa Leventi, 2014. "Distributive Effects of the Crisis and Austerity in Seven EU Countries," ImPRovE Working Papers, Herman Deleeck Centre for Social Policy, University of Antwerp 14/04, Herman Deleeck Centre for Social Policy, University of Antwerp.
  2. Anusha Chari & Peter Blair Henry, 2014. "Two Tales of Adjustment: East Asian Lessons for European Growth," NBER Working Papers 19840, National Bureau of Economic Research, Inc.
  3. Forbes, Kristin & Fratzscher, Marcel & Straub, Roland, 2014. "Capital Controls and Macroprudential Measures: What Are They Good For?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9798, C.E.P.R. Discussion Papers.
  4. Giuseppe Bertola & John Driffill & Harold James & Hans-Werner Sinn & Jan-Egbert Sturm & Ákos Valentinyi, 2014. "Chapter 3: Austerity: Hurting but Helping," EEAG Report on the European Economy, CESifo Group Munich, CESifo Group Munich, vol. 0, pages 75-90, 02.
  5. Nicholas Oulton, 2013. "Medium and Long Run Prospects for UK Growth in the Aftermath of the Financial Crisis," CEP Occasional Papers, Centre for Economic Performance, LSE 37, Centre for Economic Performance, LSE.

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