The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy

45 Pages Posted: 6 Sep 2013  

Òscar Jordà

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Alan M. Taylor

University of California, Davis - Department of Economics; University of Virginia - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: September 2013

Abstract

After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into a loss of 4 percent of real GDP over five years when implemented in a slump, rather than just 1 percent in a boom. We illustrate our findings with a counterfactual evaluation of the impact of the UK government’s shift to austerity policies in 2010 on subsequent growth.

Suggested Citation

Jordà, Òscar and Taylor, Alan M., The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy (September 2013). NBER Working Paper No. w19414. Available at SSRN: https://ssrn.com/abstract=2321504

Òscar Jordà (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

Alan M. Taylor

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1572 (Phone)
530-752-9382 (Fax)

HOME PAGE: http://www.econ.ucdavis.edu/faculty/amtaylor/

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States
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(434)-982-2904 (Fax)

HOME PAGE: http://people.virginia.edu/~amt7u

National Bureau of Economic Research (NBER)

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HOME PAGE: http://nber.org

Centre for Economic Policy Research (CEPR)

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United Kingdom

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