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Austerity versus stimulus: the polarizing effect of fiscal policy

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  • Richard McManus

Abstract

Through constructing a new Keynesian DSGE model with heterogeneous agents, this article investigates both the aggregate and distributional consequences of fiscal policy. Polarized preferences over the conduct of fiscal policy emerge between those agents who participate in credit markets and those who do not. Exogenous shocks impact the two types of agent differently, and as a result, fiscal policy responses to these shocks produce minimal aggregate welfare effects as the gains of one agent are matched by the losses of another. There is therefore a normative justification for counter-cyclical fiscal policy, but on redistributive rather than stabilization grounds.

Suggested Citation

  • Richard McManus, 2015. "Austerity versus stimulus: the polarizing effect of fiscal policy," Oxford Economic Papers, Oxford University Press, vol. 67(3), pages 581-597.
    • Handle: RePEc:oup:oxecpp:v:67:y:2015:i:3:p:581-597.
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    File URL: http://hdl.handle.net/10.1093/oep/gpv023
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    Cited by:

    1. Richard McManus & F Gulcin Ozkan & Dawid Trzeciakiewicz, 2021. "Fiscal consolidations and distributional effects: which form of fiscal austerity is least harmful?," Oxford Economic Papers, Oxford University Press, vol. 73(1), pages 317-349.
    2. Ganelli, Giovanni & Rankin, Neil, 2020. "Fiscal deficits as a source of boom and bust under a common currency," Journal of International Money and Finance, Elsevier, vol. 104(C).
    3. Klaus Gründler & Niklas Potrafke, 2019. "Ideologically-charged terminology: austerity, fiscal consolidation, and sustainable governance," CESifo Working Paper Series 7613, CESifo.

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