Does austerity pay off?

Benjamin Born, Gernot Müller and Johannes Pfeifer

No 77, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We ask whether cuts of government consumption lower or raise the sovereign default premium. To address this question, we set up a new data set for 38 emerging and advanced economies which contains quarterly time-series observations for sovereign default premia, government consumption, and output. We find that whether austerity pays off depends on a) initial conditions and b) the time-horizon under consideration. Spending cuts in times of fiscal stress raise default premia, but lower premia in benign times. These findings pertain to the short run. Austerity always pays off in the long run, but particularly so if initial conditions are bad.

Keywords: Fiscal policy; austerity; sovereign risk; default premium; local projections; panel VAR; fiscal stress (search for similar items in EconPapers)
JEL-codes: C32 E43 E62 (search for similar items in EconPapers)
Date: 2015, Revised 2015
New Economics Papers: this item is included in nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Related works:
Journal Article: Does Austerity Pay Off? (2020)
Working Paper: Does austerity pay off? (2015)
Working Paper: Does austerity pay off? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:77

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