Does austerity pay off?

Benjamin Born, Gernot Müller and Johannes Pfeifer

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: Austerity measures are frequently enacted when the sustainability of public finances is in doubt. Such doubts are reflected in high sovereign yield spreads and put further strain on government finances. Is austerity successful in restoring market confidence, bringing about a reduction in yield spreads? We employ a new panel data set which contains sovereign yield spreads for 26 emerging and advanced economies and estimate the effects of cuts of government consumption on yield spreads and economic activity. The conditions under which austerity takes place are crucial. During times of fiscal stress, spreads rise in response to the spending cuts, at least in the short-run. In contrast, austerity pays off, if conditions are more benign.

Keywords: fiscal policy; austerity; sovereign risk; yield spreads; confidence; panel VAR; local projections (search for similar items in EconPapers)
JEL-codes: E32 E60 E62 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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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? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100301

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