Fiscal Policy, Potential Output and the Shifting Goalposts

Fatás, Antonio
Authors registered in the RePEc Author Service: Antonio Fatas

No 13149, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies the negative loop created by the interaction between pessimistic estimates of potential output and the effects of fiscal policy during the 2008-2014 period in Europe. The crisis of 2008 created an overly pessimistic view on potential output among policy makers that led to a large adjustment in fiscal policy. Contractionary fiscal policy, via hysteresis effects, caused a reduction in potential output that validated the original pessimistic forecasts and led to a second round of fiscal consolidation. The evidence suggests that this succession of contractionary fiscal policies was likely self-defeating for many European countries as the negative effects on GDP caused more damage to the sustainability of debt than the benefits of the budgetary adjustments. The paper concludes by discussing alternative frameworks for fiscal policy that could potentially avoid this negative loop in future crises.

Keywords: Fiscal policy; Hysteresis; Potential output (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-eec and nep-mac
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Citations: View citations in EconPapers (1)

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Journal Article: Fiscal Policy, Potential Output, and the Shifting Goalposts (2019)
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