Two Tales of Adjustment: East Asian Lessons for European Growth
In 2008, euro area governments instituted fiscal stimulus to counteract the shock of the Global Financial Crisis. In 2010, they changed tack and pursued consolidation. East Asia also implemented stimulus in response to its 1997–98 financial crisis but, unlike Europe, continued fiscal expansion until growth recovered. The baseline difference between the average growth rate of the east Asian countries and the European Periphery/GIIPS prior to their respective crises was 4.21 percentage points. This difference widens to 7.18 percentage points following the European pivot to austerity in region-specific crisis event time. Panel regressions confirm the statistical significance of this 2.97 percentage point increase in the difference-in-difference estimate suggesting that more gradual fiscal consolidation in the GIIPS might have promoted stronger recovery.
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