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The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy
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Journal Article
The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy
2016
Overview
After the Global Financial Crisis, a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This article, reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a 1% of GDP fiscal consolidation translates into a loss of 3.5% of real GDP over five years when implemented in a slump, rather than just 1.8% in a boom.
Publisher
Blackwell Publishing Ltd,John Wiley & Sons Ltd,Wiley-Blackwell$h1891,Oxford University Press
Subject
