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The time for austerity: Estimating the average treatment effect of fiscal policy

Oscar Jorda () and Alan Taylor ()

No 79, SAFE Working Paper Series from Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt

Abstract: After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government's shift to austerity policies in 2010 on subsequent growth.

Keywords: Rubin Causal Model; allocation bias; average treatment effect; booms; fiscal multipliers; identification; inverse probability weighting; local projection; matching; output fluctuations; propensity score; regression adjustment; slumps (search for similar items in EconPapers)
JEL-codes: C54 C99 E32 E62 H20 H5 N10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg, nep-ias, nep-mac, nep-pbe and nep-pke
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

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https://www.econstor.eu/bitstream/10419/106148/1/815409583.pdf (application/pdf)

Related works:
Journal Article: The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy (2016) Downloads
Working Paper: The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy (2013) Downloads
Working Paper: The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy (2013) Downloads
Working Paper: The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy (2013) Downloads
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