Long-term effects of fiscal stimulus and austerity in Europe

Sebastian Gechert, Gustav Horn and Christoph Paetz ()

No 179-2017, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: We analyze whether there are negative (positive) long-term effects of austerity measures (stimulus measures) on potential output growth. Based on the approach of Blanchard and Leigh (2013) and Fatás and Summers (2016) and using a novel dataset of narratively identified fiscal policy shocks, we estimate the impact of these shocks on potential output. We robustly find strong and persistent long-run multiplier effects for most European Countries in the early years after the financial crisis and subsequent Euro Area crisis. We conclude that early stimulus was beneficial even in the long-run, while the subsequent turn to austerity was badly timed and thus not only deepened the crisis but caused evitable hysteresis effects.

Keywords: Fiscal Consolidation; Fiscal Multipliers; Forecast Errors; Hysteresis (search for similar items in EconPapers)
JEL-codes: E62 H68 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2017
New Economics Papers: this item is included in nep-eec and nep-mac
References: View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Long‐term Effects of Fiscal Stimulus and Austerity in Europe (2019)
Working Paper: Long-term effects of fiscal stimulus and austerity in Europe (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:179-2017

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