Working Paper: CEPR ID: DP10902
Authors: Antonio Fatás; Lawrence H. Summers
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 Codes: E32; E62; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal consolidations (E62) | GDP (E20) |
| Fiscal consolidations (E62) | Higher debt-to-GDP ratios (H69) |
| GDP shocks (F62) | Permanent lowering of GDP levels (E31) |
| Revisions to potential GDP (E23) | Actual GDP changes (E20) |
| Fiscal policy decisions (E62) | Long-term consequences on GDP (F69) |