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Austerity in the Aftermath of the Great Recession

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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. 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.
    3. Woodford, Michael & WALSH, CARL E., 2005. "Interest And Prices: Foundations Of A Theory Of Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 9(03), pages 462-468, June.
    4. de Walque, Gregory & Lundvall, Henrik & Papageorgiou, Dimitris & Rysanek, Jakub & Kulikov, Dmitry & Júlio, Paulo & Lozej, Matija & Sideris, Dimitris & Maria, José R. & Micallef, Brian & Schmidt, Sebas, 2015. "Comparing fiscal multipliers across models and countries in Europe," Working Paper Series 1760, European Central Bank.
    5. repec:ucp:jpolec:doi:10.1086/696277 is not listed on IDEAS
    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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    Cited by:

    1. repec:nbr:nberch:13962 is not listed on IDEAS
    2. 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.
    3. Arellano, Cristina & Bai, Yan & Bocola, Luigi, 2017. "Sovereign risk and firm heterogeneity," Staff Report 547, Federal Reserve Bank of Minneapolis.
    4. Fatás, Antonio & Summers, Lawrence H., 2018. "The permanent effects of fiscal consolidations," Journal of International Economics, Elsevier, vol. 112(C), pages 238-250.
    5. Siming Liu, 2018. "Government Spending during Sudden Stop Crises," Caepr Working Papers 2018-002 Classification-E, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    6. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign Default Risk and Firm Heterogeneity," NBER Working Papers 23314, National Bureau of Economic Research, Inc.

    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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