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Austerity in the Aftermath of the Great Recession

Author

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  • Christopher L. House
  • Christian Proebsting
  • Linda L. Tesar

Abstract

We examine austerity in advanced economies since the Great Recession. Austerity shocks are reductions in government purchases that exceed reduced-form forecasts. Austerity shocks are statistically associated with lower real GDP, lower inflation and higher net exports. We estimate a cross-sectional multiplier of roughly 2. A multi-country DSGE model calibrated to 29 advanced economies generates a multiplier consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity shocks were sufficiently contractionary that debt-to-GDP ratios in some European countries increased as a consequence of endogenous reductions in GDP and tax revenue.

Suggested Citation

  • Christopher L. House & Christian Proebsting & Linda L. Tesar, 2017. "Austerity in the Aftermath of the Great Recession," NBER Working Papers 23147, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23147
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    References listed on IDEAS

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    1. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
    2. Scott Brave & Jeffrey R. Campbell & Jonas D. M. Fisher & Alejandro Justiniano, 2012. "The Chicago Fed DSGE model," Working Paper Series WP-2012-02, Federal Reserve Bank of Chicago.
    3. Robert E. Hall, 2009. "By How Much Does GDP Rise If the Government Buys More Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
    4. Woodford, Michael & WALSH, CARL E., 2005. "Interest And Prices: Foundations Of A Theory Of Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 9(3), pages 462-468, June.
    5. de Walque, Gregory & Pisani, Massimiliano & Kilponen, Juha & Thomas, Carlos & Hlédik, Tibor & Hurtado, Samuel & Hollmayr, Josef & Corbo, Vesna & Schmidt, Sebastian & Micallef, Brian & Maria, José R. &, 2015. "Comparing fiscal multipliers across models and countries in Europe," Working Paper Series 1760, European Central Bank.
    6. Valerie A. Ramey & Sarah Zubairy, 2018. "Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 850-901.
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    Citations

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    Cited by:

    1. Tamborini, Roberto & Tomaselli, Matteo, 2020. "The determinants of austerity in the European Union 2010–16," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    2. Chodorow-Reich, Gabriel & Karabarbounis, Loukas & Kekre, Rohan, 2019. "The Macroeconomics of the Greek Depression," CEPR Discussion Papers 13762, C.E.P.R. Discussion Papers.
    3. Fragetta, Matteo & Tamborini, Roberto, 2019. "It's not austerity. Or is it? Assessing the effect of austerity on growth in the European Union, 2010-15," International Review of Economics & Finance, Elsevier, vol. 62(C), pages 196-212.
    4. Alesina, Alberto & Barbiero, Omar & Favero, Carlo A. & Giavazzi, Francesco & Paradisi, Matteo, 2017. "The effects of Fiscal Consolidations: Theory and Evidence," CEPR Discussion Papers 12016, C.E.P.R. Discussion Papers.
    5. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign risk and firm heterogeneity," Staff Report 547, Federal Reserve Bank of Minneapolis.
    6. Valerie A. Ramey, 2019. "Ten Years after the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research?," Journal of Economic Perspectives, American Economic Association, vol. 33(2), pages 89-114, Spring.
    7. Ioanna Bardaka & Ioannis Bournakis & Georgia Kaplanoglou, 2018. "Total factor productivity (TFP) and fiscal consolidation: how harmful is austerity?," Working Papers 255, Bank of Greece.
    8. Fatás, Antonio & Summers, Lawrence H., 2018. "The permanent effects of fiscal consolidations," Journal of International Economics, Elsevier, vol. 112(C), pages 238-250.
    9. Siming Liu, 2018. "Spending Multiplier during Sudden Stop Crises," 2018 Meeting Papers 226, Society for Economic Dynamics.
    10. Siming Liu, 2018. "Government Spending during Sudden Stop Crises," CAEPR Working Papers 2018-002, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    11. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign Default Risk and Firm Heterogeneity," NBER Working Papers 23314, National Bureau of Economic Research, Inc.
    12. Anna Matysiak & Tomáš Sobotka & Daniele Vignoli, 0. "The Great Recession and Fertility in Europe: A Sub-national Analysis," European Journal of Population, Springer;European Association for Population Studies, vol. 0, pages 1-36.
    13. Atanas Pekanov, 2019. "Policy Brief: Past and Present of EMU Reform. Reforming the Euro Area – The Road Not (Yet) Taken," WIFO Studies, WIFO, number 61850.
    14. Canofari, Paolo & Piergallini, Alessandro & Piersanti, Giovanni, 2020. "The Fallacy Of Fiscal Discipline," Macroeconomic Dynamics, Cambridge University Press, vol. 24(1), pages 55-68, January.

    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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