Working Paper: CEPR ID: DP9646
Authors: Scar Jord; Alan M. Taylor
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.
Keywords: allocation bias; average treatment effect; booms; fiscal multipliers; identification; inverse probability weighting; local projection; matching; output fluctuations; propensity score regression adjustment; Rubin causal model; slumps
JEL Codes: C54; C99; E32; E62; H20; H5; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal consolidations can be expansionary in certain conditions (E62) | GDP growth (O49) |
| Austerity measures are contractionary during downturns (E62) | GDP growth (O49) |
| Fiscal austerity (E62) | GDP growth (O49) |
| Fiscal austerity during economic slump (E62) | GDP growth (O49) |
| Fiscal austerity during economic boom (E62) | GDP growth (O49) |