Alesina, Barbiero, Favero, Giavazzi & Paradisi: Austerity in 2009-2013

From the Introduction:

The deficit reduction policies (often referred to as fiscal “austerity”) followed by several OECD countries in 2009-13 were motivated, especially in the European Union, by the bond market reaction to large debts and deficits. They were certainly not meant to cool down overheating economies. On the contrary, several countries had to adopt deficit reduction policies when recessions were not quite over and credit crunches were still retarding the recovery. The aim of this paper is to provide an empirical measure of the effects of these deficit reduction policies on output growth. The summer of 2014, when we write, is probably the earliest time when one can begin to assess the effects of these policies.

We analyze the main features of fiscal adjustment policies, starting from their composition: how they were divided between tax increases and spending cuts, and what has been their cost in terms of output losses. We also examine whether this round of fiscal adjustments, which occurred after a financial and banking crisis, has had different effects on the economy compared to earlier fiscal consolidations carried out in “normal” times. In addition, contrary to previous cases, this time many countries implemented fiscal adjustments at the same time, possibly deepening their recessionary effects due to interdependence of these economies.


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