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Austerity, fiscal volatility, and economic growth

Listed author(s):
  • Curatola, Giuliano
  • Donadelli, Michael
  • Gioffré, Alessandro
  • Grüning, Patrick

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.

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File URL: https://www.econstor.eu/bitstream/10419/98699/1/789041936.pdf
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Paper provided by Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt in its series SAFE Working Paper Series with number 56.

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Date of creation: 2014
Handle: RePEc:zbw:safewp:56
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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.
  3. Michael B. Devereux & James Yetman, 2010. "Leverage Constraints and the International Transmission of Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 71-105, 09.
  4. Ana Maria Santacreu, 2009. "Innovation, diffusion and trade: theory and measurement," 2009 Meeting Papers 374, Society for Economic Dynamics.
  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.
  8. Schaltegger, Christoph A. & Weder, Martin, 2014. "Austerity, inequality and politics," European Journal of Political Economy, Elsevier, vol. 35(C), pages 1-22.
  9. Gianluca Benigno & Pierpaolo Benigno & Salvatore Nisticò, 2012. "Risk, Monetary Policy, and the Exchange Rate," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 247-309.
  10. Alberto Alesina & Silvia Ardagna, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," NBER Chapters,in: Tax Policy and the Economy, Volume 24, pages 35-68 National Bureau of Economic Research, Inc.
  11. Pancrazi, Roberto, 2014. "How beneficial was the Great Moderation after all?," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 73-90.
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