Working Paper: NBER ID: w22374
Authors: Antonio Fatas; 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. 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.
Keywords: No keywords provided
JEL Codes: E32; E62; O4
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) | Downward revision in GDP forecasts (H68) |
| 1% reduction in GDP due to fiscal consolidation (E62) | More than 1% decrease in potential output (E31) |
| Fiscal policy-induced changes in GDP (E62) | Persistent effects extending into 2021 (F69) |
| Attempts to reduce debt through austerity measures (H63) | Higher debt-to-GDP ratios (H69) |