Immutable laws of debt dynamics

Martin Watts and Timothy Sharpe

Journal of Post Keynesian Economics, 2013, vol. 36, issue 1, 59-84

Abstract: In the aftermath of the global financial crisis (GFC), the ostensible focus of medium-term macroeconomic policy in most advanced sovereign and nonsovereign countries has been the pursuit of fiscal sustainability through fiscal consolidation, which is often justified by reference to the algebra of debt and deficit dynamics (Blanchard et al., 1990; Buiter, 2010a; Escalano, 2010; Ley, 2010). On the other hand, modern monetary theorists, including Fullwiler (2006), reject the necessity of fiscal austerity in sovereign economies. In this paper, we revisit the algebra underpinning debt and deficit dynamics and critically assess the arguments for the imposition of austerity measures across all advanced economies that have experienced increases in deficit and debt ratios, since the advent of the GFC.

Date: 2013
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DOI: 10.2753/PKE0160-3477360104

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