May austerity be counterproductive?
Pablo García Sánchez () and
Miguel Sebastián ()
Additional contact information
Miguel Sebastián: Universidad Complutense de Madrid
No 13-07, Working Papers from Asociación Española de Economía y Finanzas Internacionales
This paper investigates the impact that fiscal policy has on economic activity and sovereign debt during economic downturns in the euro area, mainly Germany and Spain. Our theoretical and empirical framework shows that the macroeconomic returns of austerity crucially depend on the values of fiscal multipliers. We find that, for the Spanish economy, even if policy makers just focus on the public debt ratio, ignoring output and unemployment, policies of deficit reduction may be self-defeating, especially if carried on via tax increases. In fact, counter cyclical policies beat deficit consolidation policies in stabilizing the sovereign debt ratio, no matter if shocks are on aggregate supply or aggregate demand. By contrast, in the German case, we cannot reject the hypothesis that austerity works, even under a sluggish economy.
Keywords: Sovereign Debt; Fiscal Policy; Fiscal Multipliers (search for similar items in EconPapers)
JEL-codes: E62 H30 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
References: Add references at CitEc
Citations Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:aee:wpaper:1307
Access Statistics for this paper
More papers in Working Papers from Asociación Española de Economía y Finanzas Internacionales Contact information at EDIRC.
Bibliographic data for series maintained by Luis Miguel del Corral Cuervo ().