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Austerity in the aftermath of the great recession

Christopher L. House, Christian Proebsting and Linda L. Tesar

Journal of Monetary Economics, 2020, vol. 115, issue C, 37-63

Abstract: Cross-country differences in austerity, defined as government purchases below forecast, account for 75% of the observed cross-sectional variation in GDP in advanced economies during 2010–2014. Statistically, austerity is associated with lower GDP, lower inflation and higher net exports. A multi-country DSGE model calibrated to 29 advanced economies generates effects of austerity consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity was so contractionary that debt-to-GDP ratios in some countries increased as a result of endogenous reductions in GDP and tax revenue.

Keywords: Austerity; Fiscal policy; Multi-country DSGE model (search for similar items in EconPapers)
JEL-codes: E62 F41 F44 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Austerity in the Aftermath of the Great Recession (2019) Downloads
Working Paper: Austerity in the Aftermath of the Great Recession (2017) Downloads
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DOI: 10.1016/j.jmoneco.2019.05.004

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