The Permanent Effects of Fiscal Consolidations

36 Pages Posted: 28 Oct 2015

See all articles by Antonio Fatás

Antonio Fatás

INSEAD; Centre for Economic Policy Research (CEPR); ABFER

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2015

Abstract

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).

Keywords: austerity, fiscal policy, Great Recession, hysteresis, persistence

JEL Classification: E32, E62, O40

Suggested Citation

Fatas, Antonio and Summers, Lawrence H., The Permanent Effects of Fiscal Consolidations (October 2015). CEPR Discussion Paper No. DP10902. Available at SSRN: https://ssrn.com/abstract=2682589

Antonio Fatas (Contact Author)

INSEAD ( email )

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Centre for Economic Policy Research (CEPR)

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ABFER ( email )

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Lawrence H. Summers

Harvard University ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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Cambridge, MA 02138
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