Lagging behind: the hysteresis of austerity

Andrea Tafuro ()
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Andrea Tafuro: Copenhagen Business School

Empirical Economics, 2024, vol. 66, issue 1, No 11, 327-368

Abstract: Abstract This paper investigates the role of hysteresis in the long-term transmission of consolidations in a panel of 17 OECD countries. The evidence supports that the hysteresis of the labour market is the main driver of consolidations’ long-term effects: an increase in the rigidity of the labour market exacerbates and prolongs the contraction following tax-based consolidations, while it mutes the expansion following expenditure-based consolidations. In contrast, the response of productivity is irrelevant to the presence of the long-term scars.

Keywords: Consolidations; Fiscal policy; Hysteresis; Labour market rigidity; Potential growth (search for similar items in EconPapers)
JEL-codes: C23 E24 E62 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00181-023-02451-5

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