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Austerity Programs under Liquidity Constraints: Stylized Facts of Recession in the Euro Area

Author

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  • Nicos Christodoulakis

    () (Athens University of Economics & Business (AUEB), and Hellenic Observatory LSE. 76, Patission street, Athens 10434)

Abstract

Employing a stochastic Brownian pattern for labor income under liquidity constraints, the paper derives closed-form solutions for households’ consumption and shows how both the multiplier and the variability of consumption increased after the global crisis and were further enhanced by the austerity programs. The properties of the theoretical model are found to be in line with a number of stylized facts observed in the Southern Euro Area countries, where recession is ravaging for three years after the implementation of austerity programs. A critical factor of such a prolonged recession was that austerity programs were at the same time too harsh and intensive, grossly underestimating the adverse effects on economic activity. The paper argues that the same fiscal adjustment could have been achieved more gradually and with milder effects on households’ demand.

Suggested Citation

  • Nicos Christodoulakis, 2014. "Austerity Programs under Liquidity Constraints: Stylized Facts of Recession in the Euro Area," Credit and Capital Markets, Credit and Capital Markets, vol. 47(2), pages 265-296.
  • Handle: RePEc:kuk:journl:v:47:y:2014:i:2:p:265-296
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    Cited by:

    1. Christodoulakis, Nicos, 2016. "Aspects of economic governance in the Euro area: restoring internal and external balances," LSE Research Online Documents on Economics 69169, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    Debt; Fiscal Policy; liquidity constraints;

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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