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The time for austerity: estimating the average treatment effect of fiscal policy

  • Òscar Jordà
  • Alan M. Taylor

Elevated government debt levels in advanced economies have risen rapidly as sovereigns absorbed private sector losses and cyclical deficits blew up in the Global Financial Crisis and subsequent slump. A rush to fiscal austerity followed but its justifications and impacts have been heavily debated. Research on the effects of austerity on macroeconomic aggregates remains unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified framework. We do this by first evaluating the validity of common identification assumptions used by the literature and find that they are largely violated in the data. Next, we use new propensity score methods for time-series data with local projections to quantify how contractionary austerity really is, especially in economies operating below potential. We find that the adverse effects of austerity may have been understated.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2013-25.

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Date of creation: 2013
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Handle: RePEc:fip:fedfwp:2013-25
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  23. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2011. "When credit bites back: leverage, business cycles, and crises," Working Paper Series 2011-27, Federal Reserve Bank of San Francisco.
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  29. Michael T. Owyang & Valerie A. Ramey & Sarah Zubairy, 2013. "Are government spending multipliers greater during periods of slack? evidence from 20th century historical data," Working Papers 2013-004, Federal Reserve Bank of St. Louis.
  30. Moritz Schularick & Alan Taylor & Oscar Jorda, 2013. "When Credit Bites Back," 2013 Meeting Papers 71, Society for Economic Dynamics.
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