Eurozone recovery: there are no shortcuts
Roberto Perotti 13 September 2014
There is a growing consensus that austerity is contributing to the Eurozone’s macroeconomic malaise, but also that spending cuts are needed in the long run to achieve fiscal sustainability. Some commentators have advocated a temporary tax cut financed by unsterilised ECB purchases of long-term public debt, accompanied by a commitment to future spending cuts. This column argues that such commitments are simply not credible – especially given the moral hazard problem created by central bank monetisation of debts.
The consensus is increasing that austerity has not worked – Europe stands on the edge of deflation and suffers from a deficit of demand. A recent VoxEU proposal (Giavazzi and Tabellini 2014) offers a solution that is widely shared on both sides of the Atlantic – all Eurozone countries should cut taxes simultaneously by 5% of GDP, and the ECB should buy the extra debt without sterilisation. This should be accompanied by a credible plan to reduce government spending in the future.
Macroeconomic policy Monetary policy
austerity, eurozone, monetary policy, helicopter money, quantitative easing, QE, stimulus, fiscal consolidation, fiscal policy, spending cuts, fiscal sustainability, debt monetisation
Did the Cash for Clunkers stimulus programme reduce new vehicle spending?
Mark Hoekstra, Steve Puller, Jeremy West 03 September 2014
‘Cash for Clunkers’ was billed as a stimulus programme that would boost sales to the ailing US auto industry in 2009. This column shows that the design of the programme actually caused it to reduce revenues to the industry it was designed to help. The authors estimate that the entire increase in sales during the programme would have happened anyway in the following eight months. Moreover, since more fuel-efficient cars tend to be less expensive, the fuel economy requirement of the programme incentivised households to buy cheaper cars.
Cash for Clunkers as stimulus
There has been significant debate about the role of various federal fiscal and monetary policies during recessions. Among the fiscal stimulus programmes, however, one seemed to hold particular promise. The Car Allowance Rebate System (CARS), better known as Cash for Clunkers, provided subsidies of up to $4,500 to households who scrapped their existing ‘clunker’ and purchased a new, fuel-efficient vehicle. Subsidies totalled nearly $3 billion.
Energy Environment Macroeconomic policy
Cash for clunkers, scrapping subsidies, stimulus, environment, fuel efficiency, fiscal policy, cars, Auto industry
The effectiveness of fiscal and monetary stimulus in depressions
Barry Eichengreen, Kevin Hjortshøj O’Rourke, Miguel Almunia, Agustín S. Bénétrix, Gisela Rua 18 November 2009
There is one important source of information on the effectiveness of monetary and fiscal stimulus in an environment of near-zero interest rates, dysfunctional banking systems and heightened risk aversion that has not been fully exploited: the 1930s. This column gathers data on growth, budgets and central bank policy rates for 27 countries covering the period 1925-39 and shows that where fiscal policy was tried, it was effective.
The debate over the effectiveness of stimulus rages on (Barro and Redlick 2009). Fewer than two years of data – that being the amount of time since monetary and fiscal measures to counter the crisis were put in place – are not enough to pin down the effects. And different theoretical models, for better or worse, predict different results. Strongly held priors rule the roost.
Great Depression, global crisis, stimulus
Design and effectiveness of fiscal-stimulus programmes
Robert Barro, Charles Redlick 30 October 2009
The recent global recession has made the efficacy of fiscal-stimulus packages one of the most prominent policy debates in economics today. This column finds that the multiplier of defence spending falls in a range of 0.6 to 0.8 and argues that non-defence multipliers are unlikely to be larger. It says we should be sceptical when policymakers claim government-spending multipliers in excess of one and suggests tax cuts may be preferable to spending increases.
The global recession of 2008-09, one of the longest and deepest since the Great Depression, has made the efficacy of fiscal-stimulus packages one of the most prominent policy debates in economics today. These packages typically attempt to smooth out business-cycle fluctuations through a combination of increased government purchases of goods and services (to replace falling private demand) and tax cuts or rebates.
fiscal policy, global crisis, stimulus, expenditure multiplier
Eurozone stimulus: A myth, some facts, and impact estimates
Volker Wieland 05 September 2009
Eurozone governments have engaged in substantial fiscal stimulus. This column argues against further fiscal measures, claiming that forward-looking firms and households will cut their expenditure in response to governmental expansions. It warns that further fiscal efforts risk eroding financial and monetary policies that are combating the crisis.
Fact: Fiscal stimulus packages put together by Eurozone governments were much smaller than the US package (American Recovery and Reinvestment Act, ARRA).
Announcements of discretionary fiscal measures by Eurozone governments only add up to about 1% of GDP in 2009 and a little less in 2010. The $787 billion stimulus by the US government amounts to over 5% of US GDP.
monetary policy, fiscal policy, stimulus
Why we need not fear that a bigger stimulus will be counterproductive
J. Bradford DeLong 16 March 2009
There are legitimate reasons to fear that deficit-spending fiscal boost programs will not work well enough and have high enough longer-term costs to be not worth doing. This column says we do not need to fear bottleneck-driven inflation, capital flight-driven inflation, crowding-out of investment spending, nor reaching the limits of debt capacity because we will see them coming in time.
My favourite line from Jaws is uttered police chief Martin Brody (Roy Scheider) when he finally sees the shark: “You are going to need a bigger boat.”
US, global crisis debate, stimulus, fear
A lot of bucks, but how much bang?
Richard Clarida 16 March 2009
Policymakers have committed substantial sums to addressing the global recession and the global financial crisis, but there is real doubt about their effectiveness. This column explains why the fiscal stimulus might fail.
“We have involved ourselves in a colossal muddle, having blundered in control of a delicate machine, the workings of which we do not understand” - John Maynard Keynes, “The Great Slump of 1930”, published December 1930.
fiscal policy, global financial crisis, global crisis debate, stimulus, multiplier
No ordinary recession
Axel Leijonhufvud 13 February 2009
This recession is different. Balance sheets of consumers, firms, and banks are under strain. The private sector is bent on reducing debt and this offsets Keynesian stimulus more than standard flow calculations would suggest. Bank deleveraging is by far the most dangerous. Fiscal stimulus will not have much effect as long as the financial system is deleveraging.
This is not an ordinary recession that differs from other recent episodes simply by being somewhat more severe. It differs in kind.
recession, stimulus, deleverage