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Expansionary Austerity? International Evidence

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  • Jaime Guajardo
  • Daniel Leigh
  • Andrea Pescatori

Abstract

This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine contemporaneous policy documents to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest that fiscal consolidation has contractionary effects on private demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.

Suggested Citation

  • Jaime Guajardo & Daniel Leigh & Andrea Pescatori, 2014. "Expansionary Austerity? International Evidence," Journal of the European Economic Association, European Economic Association, vol. 12(4), pages 949-968, August.
  • Handle: RePEc:bla:jeurec:v:12:y:2014:i:4:p:949-968
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    File URL: http://hdl.handle.net/10.1111/jeea.12083
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