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Long-term effects of fiscal stimulus and austerity in Europe

Author

Listed:
  • Sebastian Gechert

    (Macroeconomic Policy Institute (IMK), Düsseldorf)

  • Gustav Horn
  • Christoph Paetz

Abstract

We analyze whether there are negative (positive) long-term effects of austerity measures (stimulus measures) on potential output growth. Based on the approach of Blanchard and Leigh (2013) and Fatás and Summers (2016) and using a novel dataset of narratively identified fiscal policy shocks, we estimate the impact of these shocks on potential output. We robustly find a considerable underestimation of multiplier effects and their persistence for most European countries in the early years after the financial crisis and subsequent Euro Area crisis. We conclude that austerity was badly timed and thus not only deepened the crisis but may have caused evitable hysteresis effects.

Suggested Citation

  • Sebastian Gechert & Gustav Horn & Christoph Paetz, 2018. "Long-term effects of fiscal stimulus and austerity in Europe," Working Papers 2018.04, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2018.04
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    Keywords

    Fiscal Consolidation; Fiscal Multipliers; Forecast Errors; Hysteresis;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • H - Public Economics

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