DP12655 What do we know about the effects of austerity?
This paper summarizes the results of a large recent literature on multi year fiscal plans for deficit reduction (austerity). The key results are that deficit reduction policies based upon spending cuts are much less costly in terms of short run output losses than tax based adjustments. On average fiscal adjustment based upon spending cuts have very samll otput costs and in come cases they are expansionary. We then discuss which possible models can explain these findings and discuss how the evidence can disentangle them.