The Permanent Effects of Fiscal Consolidations

35 Pages Posted: 7 Jul 2016

See all articles by Antonio Fatás

Antonio Fatás

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

Larry Summers

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: June 2016

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. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.

Suggested Citation

Fatas, Antonio and Summers, Larry, The Permanent Effects of Fiscal Consolidations (June 2016). NBER Working Paper No. w22374, Available at SSRN: https://ssrn.com/abstract=2804398

Antonio Fatas (Contact Author)

INSEAD ( email )

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HOME PAGE: http://faculty.insead.edu/fatas

Centre for Economic Policy Research (CEPR)

London
United Kingdom

ABFER ( email )

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1 Business Link
Singapore, 117592
Singapore

Larry Summers

Harvard University ( email )

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