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Theoretical Modeling of Macroeconomic Stability under Austerity: The Roles of FDI, Consumption Volatility, and Wage Financing

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  • Boughabi, Houssam

Abstract

This study examines the persistence of investment in a closed economy under austerity conditions, focusing on the interaction between foreign direct investment (FDI), public expenditures, and payroll financing. We develop a dynamic model where investment volatility follows a FIGARCH process, capturing long-memory effects, while household consumption and investment interact through adaptive expectations. Policy implications suggest that strategic fiscal interventions can mitigate the adverse effects of economic contractions, supporting long-term investment flows and financial stability.

Suggested Citation

  • Boughabi, Houssam, 2025. "Theoretical Modeling of Macroeconomic Stability under Austerity: The Roles of FDI, Consumption Volatility, and Wage Financing," MPRA Paper 126296, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:126296
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    References listed on IDEAS

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    4. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    5. Jaime Guajardo & Daniel Leigh & Andrea Pescatori, 2014. "Expansionary Austerity? International Evidence," Journal of the European Economic Association, European Economic Association, vol. 12(4), pages 949-968, August.
    6. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    7. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
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    More about this item

    Keywords

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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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