Working Paper: NBER ID: w23147
Authors: Christopher L. House; Christian Proebsting; Linda L. Tesar
Abstract: We examine austerity in advanced economies since the Great Recession. Austerity shocks are reductions in government purchases that exceed reduced-form forecasts. Austerity shocks are statistically associated with lower real GDP, lower inflation and higher net exports. We estimate a cross-sectional multiplier of roughly 2. A multi-country DSGE model calibrated to 29 advanced economies generates a multiplier consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity shocks were sufficiently contractionary that debt-to-GDP ratios in some European countries increased as a consequence of endogenous reductions in GDP and tax revenue.
Keywords: Austerity; Great Recession; Economic Performance; Fiscal Policy; GDP
JEL Codes: E00; E62; F41; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in government purchases (H59) | declines in real GDP (E20) |
| austerity shocks (E65) | lower inflation rates (E31) |
| austerity shocks (E65) | higher net exports (F10) |
| reductions in government purchases (H59) | deflationary pressures (E31) |
| reductions in government purchases (H59) | depreciation of the trade-weighted nominal exchange rate (F31) |
| austerity measures (E65) | increase debt-to-GDP ratios (H63) |
| eliminating austerity (E65) | mitigated output losses in Europe (O52) |