EMPLOYMENT HYSTERESIS: AN ARGUMENT FOR AVOIDING FRONT-LOADED FISCAL CONSOLIDATIONS IN THE EUROZONE

Paulo R. Mota (), Abel L. C. Fernandes () and Paulo B. Vasconcelos ()
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Paulo R. Mota: University of Porto – School of Economics and Business and CEF.UP
Abel L. C. Fernandes: University of Porto – School of Economics and Business and NIFIP
Paulo B. Vasconcelos: University of Porto – School of Economics and Business and CMUP

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: The austerity policy applied by the Eurozone peripheral governments under the International Monetary Fund (IMF)/ European Central Bank (ECB)/ European Commission financial assistance programs has contributed to a sharp reduction of aggregate demand, regardless of the unconventional measures undertaken by the ECB. The ECB decreased the interest rate on the main refinancing operations to zero, and is buying assets from banks on a massive scale under the Expanded Asset Purchase Programme. The fact that these extraordinary measures have not been enough to produce a strong recovery, shifts the focus again to fiscal policy. Central to assessing the effects of fiscal policy are the value of impact fiscal multipliers and the size of hysteretic effects. There is widespread evidence that public expenditure multipliers are greater than one when the economy is depressed and the interest rates are close to zero. However, less is known about the importance of hysteresis effects. Using the linear play model of hysteresis we find that hysteresis effects are important in the Eurozone peripheral countries. Large fiscal impact multipliers combined with the presence of hysteresis implies that front-loaded austerity depresses the economy in the short run and these effects may persist in the long run.

Keywords: Employment; fiscal multipliers; hysteresis (search for similar items in EconPapers)
JEL-codes: E24 E62 J23 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2018-12
New Economics Papers: this item is included in nep-eec, nep-lma and nep-mac
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