Working Papers

Give Austerity a Chance

Robert Carling and I have an op-ed in today’s AFR making the case for fiscal austerity. Drawing on the work of Alberto Alesina and his co-authors, we note that austerity may work politically as well as economically:

Interestingly enough, Alesina and his co-authors also show that fiscal consolidations do not generally reduce the popularity of governments or make it more likely they will lose elections.

Indeed, they go so far as to say that “it is impossible to find systematic evidence of predictable political losses following fiscal adjustments”.

This is entirely consistent with their finding that fiscal consolidations need not have adverse implications for economic growth and may even support growth. Electorates seem to recognise this, even if politicians do not.

posted on 08 February 2012 by skirchner in Economics, Fiscal Policy, Monetary Policy

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Alesina may be right, but what do you make of the recent IMF report that draws the opposition conclusion and also claims that previous studies were (basically) wrong:

“... our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.”


Posted by .(JavaScript must be enabled to view this email address)  on  02/08  at  03:51 PM

Inflation and NGDP targeting advocates would say that the short term contractionary effects of fiscal austerity can be offset by monetary stimulus, so perhaps the mixed evidence on the short term growth outcomes under austerity is more a function of central banking competence than an inherent feature of austerity.

Posted by .(JavaScript must be enabled to view this email address)  on  02/08  at  04:57 PM

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