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The Permanent Effects of Fiscal Consolidations

In: NBER International Seminar on Macroeconomics 2017

Author

Listed:
  • Antonio Fatás
  • Lawrence Summers

Abstract

The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.
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Suggested Citation

  • Antonio Fatás & Lawrence Summers, 2017. "The Permanent Effects of Fiscal Consolidations," NBER Chapters,in: NBER International Seminar on Macroeconomics 2017 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:13962
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    References listed on IDEAS

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    Cited by:

    1. Francesco Saraceno & E Brancaccio, 2017. "Evolutions and contradictions in mainstream macroeconomics : the case of Olivier Blanchard," Sciences Po publications info:hdl:2441/1hlgq13piu8, Sciences Po.
    2. Paul De Grauwe & Yuemei Ji, 2016. "Flexibility Versus Stability: A Difficult Tradeoff in the Eurozone," Credit and Capital Markets, Credit and Capital Markets, vol. 49(3), pages 375-413.
    3. Mathilde Le Moigne & Francesco Saraceno & Sébastien Villemot, 2016. "Probably Too Little, Certainly Too Late. An Assessment of the Juncker Investment Plan," Sciences Po publications 2016-10, Sciences Po.
    4. Schilirò, Daniele, 2017. "Imbalances and policies in the Eurozone," MPRA Paper 82847, University Library of Munich, Germany.
    5. Cust,James Frederick & Mihalyi,David, 2017. "Evidence for a presource curse ? oil discoveries, elevated expectations, and growth disappointments," Policy Research Working Paper Series 8140, The World Bank.
    6. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2017. "Heterogeneity in the debt-growth nexus: Evidence from EMU countries," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 470-486.
    7. Félix Jiménez, 2018. " Capacidad productiva, cambio técnico y productividad: Estimaciones alternativas del producto de largo plazo," Documentos de Trabajo / Working Papers 2018-454, Departamento de Economía - Pontificia Universidad Católica del Perú.
    8. Olivier Coibion & Yuriy Gorodnichenko & Mauricio Ulate, 2017. "Secular Stagnation: Policy Options and the Cyclical Sensitivity in Estimates of Potential Output," Working Papers 01/2017, National Bank of Ukraine, Monetary Policy and Economic Analysis Department.
    9. repec:zbw:rwipro:177813 is not listed on IDEAS
    10. repec:erc:cypepr:v:11:y:2017:i:2:p:19-62 is not listed on IDEAS
    11. repec:eee:ecolet:v:167:y:2018:i:c:p:1-4 is not listed on IDEAS
    12. Andrea Boitani & Salvatore Perdichizzi, 2018. "Public Expenditure Multipliers in recessions. Evidence from the Eurozone," DISCE - Working Papers del Dipartimento di Economia e Finanza def068, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    13. repec:spr:empeco:v:54:y:2018:i:3:d:10.1007_s00181-017-1260-3 is not listed on IDEAS
    14. Hjelm, Göran & Stockhammar, Pär, 2016. "Short Run Effects of Fiscal Policy on GDP and Employment: Swedish Evidence," Working Papers 147, National Institute of Economic Research.
    15. Dovern, Jonas & Zuber, Christopher, 2017. "The Effect of Recessions on Potential Output Estimates: Size, Timing, and Determinants," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168180, Verein für Socialpolitik / German Economic Association.
    16. Reda Cherif & Fuad Hasanov, 2018. "Public debt dynamics: the effects of austerity, inflation, and growth shocks," Empirical Economics, Springer, vol. 54(3), pages 1087-1105, May.
    17. Soldatos, Gerasimos T., 2016. "A Short “Second Best” Narrative of the Ukrainian Economy/ Una Breve “Segunda Mejor Opción” de Narrativa de la Economía Ucraniana," MPRA Paper 81714, University Library of Munich, Germany, revised Dec 2016.
    18. repec:eee:jmacro:v:54:y:2017:i:pa:p:110-126 is not listed on IDEAS

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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