Abstract
This paper builds a framework to jointly examine the possibilities of both expansionary fiscal contractions (austerity increasing output) and fiscal free lunches (expansions reducing government debt), arguments which in recent debates have been supported by the austerity and stimulus camps, respectively. We propose a new metric quantifying the budgetary implications of fiscal action, a key aspect of fiscal policy particularly at the monetary zero lower bound. We find that austerity needs to be highly persistent and credible in order to be expansionary, and stimulus needs to be temporary, responsive, and well-targeted in order to lower debt. We conclude that neither is likely, especially during periods of economic distress.
Original language | English |
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Pages (from-to) | 32-54 |
Number of pages | 23 |
Journal | Scandinavian Journal of Economics |
Volume | 121 |
Issue number | 1 |
Early online date | 11 Sept 2017 |
DOIs | |
Publication status | Published - 30 Nov 2018 |
Bibliographical note
© 2017 John Wiley & Sons, Inc. All rights reserved. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details.Keywords
- Austerity versus stimulus
- fiscal policy
- zero lower bound