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Austerity, fiscal volatility, and economic growth

Author

Listed:
  • Curatola, Giuliano
  • Donadelli, Michael
  • Gioffré, Alessandro
  • Grüning, Patrick

Abstract

This paper contributes to the ongoing debate on the relationship between austerity measures and economic growth. We propose a general equilibrium model where (i) agents have recursive preferences; (ii ) economic growth is endogenously driven by investments in R&D; (iii) the government is committed to a zero-deficit policy and finances public expenditures by means of a combination of labor taxes and R&D taxes. We find that austerity measures that rely on reducing resources available to the R&D sector depress economic growth both in the short- and long-run. High debt EU members are currently implementing austerity measures based on higher taxes and/or lower investments in the R&D sector. This casts some doubts on the real ability of these countries to grow over the next years.

Suggested Citation

  • Curatola, Giuliano & Donadelli, Michael & Gioffré, Alessandro & Grüning, Patrick, 2014. "Austerity, fiscal volatility, and economic growth," SAFE Working Paper Series 56, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  • Handle: RePEc:zbw:safewp:56
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    References listed on IDEAS

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    1. Edison, Hali J. & Levine, Ross & Ricci, Luca & Slok, Torsten, 2002. "International financial integration and economic growth," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 749-776, November.
    2. Mendoza, Enrique G. & Tesar, Linda L. & Zhang, Jing, 2014. "Saving Europe? The unpleasant arithmetic of fiscal austerity in integrated economies," SAFE Working Paper Series 80, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
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    4. Santacreu, Ana Maria, 2015. "Innovation, diffusion, and trade: Theory and measurement," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 1-20.
    5. Laurence M. Ball & Davide Furceri & Daniel Leigh & Prakash Loungani, 2013. "The Distributional Effects of Fiscal Consolidation," IMF Working Papers 13/151, International Monetary Fund.
    6. Ben Westmore, 2013. "R&D, Patenting and Growth: The Role of Public Policy," OECD Economics Department Working Papers 1047, OECD Publishing.
    7. Jaejoon Woo & Elva Bova & Tidiane Kinda & Yuanyan S Zhang, 2013. "Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy; What Do the Data Say?," IMF Working Papers 13/195, International Monetary Fund.
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    More about this item

    Keywords

    Austerity Measures; Fiscal Policy; Endogenous Growth; R&D;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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