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Consolidation causes little austerity

  • Musgrave, Ralph S.

There is a widespread view that reducing national debts and deficits, or “consolidating” them, causes austerity or would hinder the recovery. The reality is that reducing structural debts and deficits and “stimulus debts” is easily done without any significant deflationary effects. In contrast, stimulus deficits cannot be reduced in that they are required to deal with recessions, thought they can perfectly well accumulate as extra monetary base rather than as extra debt. Money for the above debt and deficit reduction can be obtained from raised taxes and/or public spending cuts, while making good the deflationary effect of the latter with quantitative easing. As long as the deflationary effect of the former equals the stimulatory effect of the latter, there is little net effect on GDP, aggregate employment and so on. Meanwhile debts or deficits are reduced.

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File URL: http://mpra.ub.uni-muenchen.de/34295/1/MPRA_paper_34295.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34295.

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Date of creation: 25 Oct 2011
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Handle: RePEc:pra:mprapa:34295
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  1. Hillinger, Claude, 2010. "The crisis and beyond: thinking outside the box," Economics Discussion Papers 2010-1, Kiel Institute for the World Economy.
  2. Musgrave, Ralph S., 2010. "Government borrowing is pointless where a government issues its own currency," MPRA Paper 20057, University Library of Munich, Germany.
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