The theoretical weaknesses of the expansionary austerity doctrine

Alberto Botta

No 14446, Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre

Abstract: In this paper, we provide a critical analysis of the theory of the expansionary austerity. We take the hotly debated contribution by Carmen Reinhart and Kenneth Rogoff on the supposedly negative relationship between public debt and economic growth (when the debt-to-GDP ratio overcomes the 90 percent threshold) as the starting point of our analysis. We then move to analyze those contributions that more directly point to the possible expansionary outcomes of tough fiscal retrenchments. We eventually criticize the main conclusions of the expansionary austerity theory by presenting a simple short-run theoretical model. We show that fiscal consolidation might have expansionary outcomes only under extreme, very specific and uncertain circumstances. Expansionary austerity would hardly take place in the context of monetarily sovereign economies, or in presence of an accommodative monetary policy like that implemented by the ECB since late 2011, or in economic systems that are poorly integrated to international goods markets.

Keywords: fiscal policy; expansionary austerity theory; post-Keynesian macro models (search for similar items in EconPapers)
JEL-codes: E12 E61 E62 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-fdg, nep-hpe and nep-pke
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gpe:wpaper:14446

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