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The strong increase of Austrian government debt in the Kreisky era: Austro-Keynesianism or just stubborn forecast errors?

Florian Brugger () and Joern Kleinert ()
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Florian Brugger: University of Graz, Austria
Joern Kleinert: University of Graz, Austria

No 2017-15, Graz Economics Papers from University of Graz, Department of Economics

Abstract: In the Kreisky era (1970–1983), Austrian government debts increased strongly. Historically, the attitude of Kreisky and the Social Democrats towards Keynesian fiscal policy measures to fight unemployment during the oil crises has been held to be responsible for the successive budget deficits. Kreisky’s ideological debt policy has become a narrative that has strongly influenced Austrian fiscal policy until today. While this explanation for the strong increase in public debt during the Kreisky era is widely accepted, it is not necessarily true. In this paper, we assess a different explanation: the deficits might simply have resulted from forecast errors of GDP growth in those turbulent times. We find that about one-third of the increase in the debt-over-GDP ratio is directly explained by short-run forecast errors, i.e., the difference between the approved and the realized budget, and an additional one-fifth is the lower bound of forecast error regarding the long-run growth rate.

Keywords: Fiscal policy; Government debt; Forecast errors; Narrative economics (search for similar items in EconPapers)
JEL-codes: H62 H68 E37 E65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-his, nep-hpe and nep-mac
Date: 2017-12
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