Consolidation causes little austerity

Ralph Musgrave

MPRA Paper from University Library of Munich, Germany

Abstract: There is a widespread view that reducing national debts and deficits, or “consolidating” them, causes austerity or would hinder the recovery. The reality is that reducing structural debts and deficits and “stimulus debts” is easily done without any significant deflationary effects. In contrast, stimulus deficits cannot be reduced in that they are required to deal with recessions, thought they can perfectly well accumulate as extra monetary base rather than as extra debt. Money for the above debt and deficit reduction can be obtained from raised taxes and/or public spending cuts, while making good the deflationary effect of the latter with quantitative easing. As long as the deflationary effect of the former equals the stimulatory effect of the latter, there is little net effect on GDP, aggregate employment and so on. Meanwhile debts or deficits are reduced.

Keywords: consolidation; debt; deficit; austerity; stimulus (search for similar items in EconPapers)
JEL-codes: H61 H62 H63 (search for similar items in EconPapers)
Date: 2011-10-25
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