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Can fiscal austerity be expansionary in present-day Europe? The lessons from Sweden

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  • Lennart Erixon

    (Stockholm University, Sweden)

Abstract

In the aftermath of a deep recession and public budget crisis, a Social Democrat government pursued an ambitious fiscal austerity policy in Sweden in the mid 1990s. Economic advisors were guided by the idea that fiscal austerity would have neutral or expansionary effects on output and employment. In order to avoid large public deficits in the future, the government also introduced radical fiscal rules. The main conclusion in this article is that the fiscal austerity measures in the mid 1990s delayed the Swedish economic recovery and that neither these measures nor the radical fiscal rules were responsible for Sweden's impressive macroeconomic performance in the following years. The positive economic development in Sweden up until the Great Recession was driven by export, profit and technology, reflecting an international upswing and the country's flexible exchange rates and industrial composition. The floating exchange rate, together with independent monetary policy and luck, explain why Sweden could avoid a sharp decline in GDP growth during the global financial and EMU crises. The demanding fiscal rules restricted the possibilities and willingness of the non-socialist government to respond to high unemployment with an expansionary fiscal policy.

Suggested Citation

  • Lennart Erixon, 2015. "Can fiscal austerity be expansionary in present-day Europe? The lessons from Sweden," Review of Keynesian Economics, Edward Elgar Publishing, vol. 3(4), pages 567—601-5, October.
  • Handle: RePEc:elg:rokejn:v:3:y:2015:i:4:p567-601
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    References listed on IDEAS

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    Cited by:

    1. Simone Scarpa & Carl-Ulrik Schierup, 2018. "Who Undermines the Welfare State? Austerity-Dogmatism and the U-Turn in Swedish Asylum Policy," Social Inclusion, Cogitatio Press, vol. 6(1), pages 199-207.
    2. Erixon, Lennart, 2016. "Building a path of equality to economic progress and macroeconomic stability - the economic theory of the Swedish model," Research Papers in Economics 2016:3, Stockholm University, Department of Economics.

    More about this item

    Keywords

    fiscal austerity; fiscal rules; Swedish stabilization policy; Swedish growth;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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