Austerity in the Aftermath of the Great Recession
NBER Working Paper No. 23147
We examine austerity in advanced economies since the Great Recession. Austerity shocks are reductions in government purchases that exceed reduced-form forecasts. Austerity shocks are statistically associated with lower real GDP, lower inflation and higher net exports. We estimate a cross-sectional multiplier of roughly 2. A multi-country DSGE model calibrated to 29 advanced economies generates a multiplier consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity shocks were sufficiently contractionary that debt-to-GDP ratios in some European countries increased as a consequence of endogenous reductions in GDP and tax revenue.
Document Object Identifier (DOI): 10.3386/w23147
Published: Christopher L. House & Christian Proebsting & Linda L. Tesar, 2019. "Austerity in the Aftermath of the Great Recession," Journal of Monetary Economics, .
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