The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Using data seven years after the beginning of the crisis as well as estimates on potential output our analysis suggests that attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their negative impact on output. Our results provide support for the possibility of self-defeating fiscal consolidations in depressed economies as developed by DeLong and Summers (2012).
Lawrence H. Summers, Antonio Fatás, Sunday, October 25, 2015 - 00:00
Paolo Mauro, Jan Zilinsky, Friday, September 18, 2015 - 00:00
The public narrative on austerity is shaped by simple scatter plots purporting to portray the large negative impact of fiscal ‘austerity’ on economic growth. This column argues that, while recognising concerns about causality, economists should systematically explore correlations and multiple regressions, and test their robustness. The results reveal a mixed picture, lending partial support to the notion that fiscal choices and output growth are empirically associated.
Carlos Cantú, KeyYong Park, Aaron Tornell, Sunday, April 12, 2015 - 00:00
The wisdom of structural reform during a crisis is a subject of heated debate. This column compares Greece’s experience to that of Mexico during the debt crisis of the 1980s. Mexico did not receive a haircut until seven years into the crisis – after structural reform was already underway. In Mexico that reform was the outcome of an internal conversation – not a diktat from the outside – and it happened during the height of the crisis.
Anusha Chari, Peter Blair Henry, Friday, March 6, 2015 - 00:00
Marco Buti, Nicolas Carnot, Tuesday, February 24, 2015 - 00:00
Sebastian Gechert, Andrew Hughes Hallett, Ansgar Rannenberg, Thursday, February 26, 2015 - 00:00
Sebastian Gechert, Andrew Hughes Hallett, Ansgar Rannenberg, Wednesday, February 25, 2015 - 00:00
Lars P Feld, Christoph M Schmidt, Isabel Schnabel, Benjamin Weigert, Volker Wieland, Friday, February 20, 2015 - 00:00
Simon Wren-Lewis, Friday, January 30, 2015 - 00:00
Paolo Manasse, Tuesday, January 27, 2015 - 00:00
Roberto Perotti, Saturday, September 13, 2014 - 00:00
Paul De Grauwe, Monday, July 7, 2014 - 00:00
There has been a stark contrast between the experiences of Spain and the UK since the Global Crisis. This column argues that although the ECB’s Outright Monetary Transactions policy has been instrumental in reducing Spanish government bond yields, it has not made the Spanish fiscal position sustainable. Although the UK has implemented less austerity than Spain since the start of the crisis, a large currency depreciation has helped to reduce its debt-to-GDP ratio
Carlos A. Vegh , Guillermo Vuletin, Thursday, June 12, 2014 - 00:00
The question of whether fiscal policy should be pro- or countercyclical has become increasingly relevant during the recession. This column provides causal evidence from South American countries showing the success of countercyclical policy in improving social indicators of economic success, combined with correlative evidence from Europe. This represents a strike against the case for austerity-led growth.
Markus Eberhardt, Sunday, May 11, 2014 - 00:00
The debt-growth link is essential to today's marcoeconomic policy choices. This Vox Talk discusses new evidence based on data on total public debt for 105 economies between 1972 and 2009 and two centuries of data for the UK, US, Sweden and Japan. There is no convincing proof that austerity works and that it is dangerous for policy makers to pretend otherwise.
Emanuele Baldacci, Sanjeev Gupta, Carlos Mulas-Granados, Monday, March 31, 2014 - 00:00
The recent debate on the link between austerity and growth has focused on the short run. This column discusses recent research into the link between fiscal consolidation and medium-term growth under different financial conditions. If credit is not available to consumers and investors, private demand is less able to compensate for cutbacks in public demand, so large spending cuts can have a negative effect on growth. Difficult financial conditions probably explain why fiscal adjustments that worked in the 1990s have not produced similar beneficial effects on growth in recent years.
Francesco Pappadà, Yanos Zylberberg, Monday, February 3, 2014 - 00:00
Greece’s austerity package included an unprecedented increase in the VAT rate, but the resulting increase in revenue was much lower than expected. This column links this disappointing result to the ‘transparency response’ of firms to higher tax rates. In countries like Greece with poor tax monitoring, firms face a tradeoff when deciding whether to declare their activity. Transparency is a necessary condition for accessing external finance, but it also means having to pay tax. Improving credit conditions for small and medium-size Greek firms might shift this tradeoff in favour of transparency.
Markus Eberhardt, Andrea F Presbitero, Sunday, November 17, 2013 - 00:00
The idea that there is a common tipping point in the relationship between public debt and economic growth is still widespread. However, this is likely due to a misinterpretation of the existing evidence. Once we allow for the relationship between debt and growth to be country-specific, there is limited evidence supporting the presence of a within-countries debt threshold.
Silvana Tenreyro, Gregory Thwaites, Tuesday, November 12, 2013 - 00:00
Governments wary of fiscal expansion have turned to monetary policy to stimulate slowly recovering economies. This column presents evidence that lowering interest rates is ineffective during recessions – just when fiscal policy would be most effective. If this result is robust, we are seeing recent signs of recovery in spite of austerity, not because of it.
Lorenzo Bini Smaghi, Wednesday, November 6, 2013 - 00:00
Today’s austerity, many argue, is stupid. This column argues that today’s EZ austerity may arise from stupidity before the crisis – specifically lacklustre structural reform. Excess debt arose in nations maintaining unsustainable living standards and welfare systems in the face of poor growth. The Crisis forced radical adjustments such as austerity in a recession. It’s not austerity which caused low growth, but low pre-Crisis growth which ultimately caused austerity. The way out of austerity is fundamental pro-growth reforms that create room for more gradual fiscal adjustment.
Marco Buti, Pier Carlo Padoan, Tuesday, October 8, 2013 - 00:00
The causes of the Eurozone’s slow growth are much debated. This column argues that fiscal consolidation will be less of a drag going forward but that the ongoing recovery remains fragile. A policy strategy is needed to support the recovery based on three mutually reinforcing elements – reducing policy uncertainty, repairing the financial system, and undertaking structural reforms.