Austerity Measures: Do they avert solvency crises?

Christos Shiamptanis

LCERPA Working Papers from Laurier Centre for Economic Research and Policy Analysis

Abstract: Many countries are adopting austerity measures, whereby governments aggressively raise taxes, with the hope to dispel future solvency crisis. This paper investigates the implications of austerity on the likelihood of solvency crisis. We derive the maximum level of debt consistent with solvency, labelled as the effective fiscal limit on debt, and we show that its position depends on austerity. We find that countries like Italy that undergo strict austerity could lower their effective fiscal limit and induce a solvency crisis in the near future.

Keywords: Austerity; Solvency Crisis; Fiscal Policy; Fiscal Limit; Default (search for similar items in EconPapers)
JEL-codes: C63 E62 E63 F34 H63 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2017-06-19, Revised 2017-06-19
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
Note: LCERPA Working Paper No. 2017-6
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Persistent link: https://EconPapers.repec.org/RePEc:wlu:lcerpa:0103

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