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Austerity, fiscal uncertainty, and economic growth: Insights from fiscally weak EU countries

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

Abstract

Recent empirical evidence suggests that during the last years fiscally weak European countries significantly cut their R&D budgets in an effort to reduce their deficit, according to the spirit of the Fiscal Compact. We propose a general equilibrium model that endogenously captures the trade-off between costs and benefits of austerity measures driven by a zero-deficit policy. Our analysis suggests that cuts in R&D spending undermine economic growth both in the short and the long run. We use our model to estimate the reduction of economic growth due to R&D cuts implemented by fiscally weak European countries during the period 2010-2012. The model predicts a reduction in real growth by 0:63%, 2:93%, and 4:46%, in the next 1, 5, and 10 years, respectively. Moreover, we show that the zero-deficit constraint hampers economic growth in the presence of either a productivity drop or a spending stimulus.

Suggested Citation

  • Curatola, Giuliano & Donadelli, Michael & Gioffré, Alessandro & Grüning, Patrick, 2015. "Austerity, fiscal uncertainty, and economic growth: Insights from fiscally weak EU countries," SAFE Working Paper Series 56, Leibniz Institute for Financial Research SAFE.
  • Handle: RePEc:zbw:safewp:56
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    References listed on IDEAS

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    More about this item

    Keywords

    Austerity Measures; Fiscal Policy; Endogenous Growth; R&D;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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