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Who is afraid of austerity? The redistributive impact of fiscal policy in a DSGE framework

Author

Listed:
  • Richard McManus
  • F. Gulcin Ozkan
  • Dawid Trzeciakiewicz

Abstract

This paper presents a comprehensive assessment of fiscal austerity, with special emphasis on its distributional consequences, which are surprisingly ignored in the existing literature. Using amedium scale DSGE model we find that both the aggregate and distributional consequences of fiscal consolidation are shaped by its composition much more than by its speed. A trade-off emerges between effciency and equality; spending-based austerity leads to smaller net movements in output, incomes and welfare, but also to larger inequality between agents who vary by their access and use of credit markets. Given the severity of the recent downturn in most advanced economies that had adopted austerity, this trade-off between growth and distributional consequences of fiscalconsolidation is likely to pose serious challenges to policymakers in many countries.

Suggested Citation

  • Richard McManus & F. Gulcin Ozkan & Dawid Trzeciakiewicz, 2014. "Who is afraid of austerity? The redistributive impact of fiscal policy in a DSGE framework," Discussion Papers 14/22, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:14/22
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    References listed on IDEAS

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    Cited by:

    1. Richard McManus & F. Gulcin Ozkan & Dawid Trzeciakiewicz, 2014. "Self-defeating austerity at the zero lower bound," Discussion Papers 14/24, Department of Economics, University of York.

    More about this item

    Keywords

    fiscal austerity; welfare; redistribution;

    JEL classification:

    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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