The Permanent Effects of Fiscal Consolidations
The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.
We would like to thank the IMF research department for making available the data on 5-year forecasts for older vintages of the IMF World Economic Outlook. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Antonio Fatás & Lawrence H. Summers, 2017. "The Permanent Effects of Fiscal Consolidations," Journal of International Economics, . citation courtesy of