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The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy

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  • Jordà, Òscar
  • Taylor, Alan M.

Abstract

After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government’s shift to austerity policies in 2010 on subsequent growth.

Suggested Citation

  • Jordà, Òscar & Taylor, Alan M., 2013. "The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy," CEPR Discussion Papers 9646, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9646
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    References listed on IDEAS

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    Keywords

    allocation bias; austerity; average treatment effect; booms; fiscal policy; identification; inverse probability weighting; matching; multipliers; output fluctuations; slumps;

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other
    • 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
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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