The "Austerity Myth": Gain Without Pain?

Roberto Perotti ()

No 17571, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: As governments around the world contemplate slashing budget deficits, the "expansionary fiscal consolidation hypothesis" is back in vogue. I argue that, as a statement about the short run, it should be taken with caution. I present four detailed case studies, two - Denmark and Ireland - undertaken under fixed exchange rates (the most relevant case for many Eurozone countries today) and two - Finland and Sweden - after floating the currency. All four episodes were associated with an expansion; but only in Denmark the driver of growth was internal demand. However, after three years a long slump set in as the economy lost competitiveness. In all the others for a long time the main driver of growth was exports. In Ireland this occurred because the sterling coincidentally appreciated. In Finland and Sweden the currency experienced an extremely large depreciation after floating. In all consolidations interest rate fell fast, and wage moderation played a key role in generating a gain competitiveness and a decline in interest rates. These results cast doubt on at least some versions of the "expansionary fiscal consolidations" hypothesis.

JEL-codes: E62 E65 F32 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (77)

Published as The "Austerity Myth": Gain without Pain? , Roberto Perotti. in Fiscal Policy after the Financial Crisis , Alesina and Giavazzi. 2013

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Chapter: The "Austerity Myth": Gain without Pain? (2012)
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