Fiscal Austerity and the Multiplier in Times of Crisis

Gernot Müller

German Economic Review, 2014, vol. 15, issue 2, 243-258

Abstract: type="main" xml:id="geer12020-abs-0001">

To address concerns about the sustainability of public debt, most industrialized countries shifted towards fiscal austerity after 2010. A popular concern is that austerity is self-defeating, because fiscal multipliers can be large. Specifically, a number of recent studies find that multipliers tend to be large during financial crises and/or if monetary policy is constrained by the zero lower bound. However, public debt crises tend to have an offsetting effect by making multipliers smaller than during normal times. Consequently, while austerity is no cure for all, it is unlikely to be literally self-defeating when sovereign risk is high.

Date: 2014
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