Discussion Paper Details

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Title: The Permanent Effects of Fiscal Consolidations

Author(s): Antonio Fatás and Lawrence Summers

Publication Date: October 2015

Keyword(s): austerity, fiscal policy, Great Recession, hysteresis and persistence

Programme Area(s): Macroeconomics and Growth and Monetary Economics and Fluctuations

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).

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Bibliographic Reference

Fatás, A and Summers, L. 2015. 'The Permanent Effects of Fiscal Consolidations'. London, Centre for Economic Policy Research.