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The role of expectations in austerity cycles: The political economy of crisis management in Ireland and Greece

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  • Dóra Győrffy

    (Péter Pázmány Catholic University, Institute of International Studies and Political Science, Budapest, Hungary)

Abstract

The main goal of the paper is to explain the role of expectations in austerity cycles during financial bailouts. The paper presents a political economy model of bailouts, where the conditions, their implementation, and market reception are considered as forms of a social dilemma. In such situations, expectations about the actions of other actors approximated by the concepts of trust or distrust play a critical role. An environment of trust is conducive to mitigating the size and effects of fiscal contraction, while an environment of distrust is likely to magnify both. It is also argued that the credibility of government is the key driving force in these self-reinforcing cycles. The crisis management experiences of Greece and Ireland serve to illustrate the theoretical model.

Suggested Citation

  • Dóra Győrffy, 2014. "The role of expectations in austerity cycles: The political economy of crisis management in Ireland and Greece," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(4), pages 481-509, December.
    • Handle: RePEc:aka:aoecon:v:64:y:2014:i:4:p:481-509
    Note: I am grateful to László Csaba, Péter Mihályi and the two anonymous referees for their helpful comments on earlier versions of this paper. The research was supported by TÁMOP Grant 4.2.1 B-11/2/KMR-2011-0002 of the Hungarian government and the European Union as well as the Bolyai fellowship from the Hungarian Academy of Sciences.
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    Keywords

    austerity cycles; financial crisis management; trust; Greece; Ireland;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F50 - International Economics - - International Relations, National Security, and International Political Economy - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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