IDEAS home Printed from https://ideas.repec.org/h/nbr/nberch/13962.html
   My bibliography  Save this book chapter

The Permanent Effects of Fiscal Consolidations

In: NBER International Seminar on Macroeconomics 2017

Author

Listed:
  • Antonio Fatás
  • Lawrence H. Summers

Abstract

The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Antonio Fatás & Lawrence H. Summers, 2017. "The Permanent Effects of Fiscal Consolidations," NBER Chapters, in: NBER International Seminar on Macroeconomics 2017, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:13962
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Stadler, George W, 1990. "Business Cycle Models with Endogenous Technology," American Economic Review, American Economic Association, vol. 80(4), pages 763-778, September.
    3. House, Christopher L. & Proebsting, Christian & Tesar, Linda L., 2020. "Austerity in the aftermath of the great recession," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 37-63.
    4. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, vol. 98(1), pages 439-457, March.
    5. repec:cbo:report:523702 is not listed on IDEAS
    6. Claessens, Stijn & Kose, M. Ayhan & Terrones, Marco E., 2012. "How do business and financial cycles interact?," Journal of International Economics, Elsevier, vol. 87(1), pages 178-190.
    7. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "Recovery from Financial Crises: Evidence from 100 Episodes," American Economic Review, American Economic Association, vol. 104(5), pages 50-55, May.
    8. Greg Howard & Robert F. Martin & Beth Anne Wilson, 2011. "Are recoveries from banking and financial crises really so different?," International Finance Discussion Papers 1037, Board of Governors of the Federal Reserve System (U.S.).
    9. Alan J. Auerbach & Yuriy Gorodnichenko, 2013. "Output Spillovers from Fiscal Policy," American Economic Review, American Economic Association, vol. 103(3), pages 141-146, May.
    10. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98, National Bureau of Economic Research, Inc.
    11. Taylor, Alan M. & Schularick, Moritz & Jordà , Òscar, 2011. "When Credit Bites Back: Leverage, Business Cycles, and Crises," CEPR Discussion Papers 8678, C.E.P.R. Discussion Papers.
    12. Campbell, John Y. & Mankiw, N. Gregory, 1989. "International evidence on the persistence of economic fluctuations," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 319-333, March.
    13. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," American Economic Review, American Economic Association, vol. 103(3), pages 117-120, May.
    14. Engler, Philipp & Tervala, Juha, 2018. "Hysteresis and fiscal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 39-53.
    15. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(3), pages 1469-1513.
    16. Michael D. Bordo & Joseph G. Haubrich, 2017. "Deep Recessions, Fast Recoveries, And Financial Crises: Evidence From The American Record," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 527-541, January.
    17. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90, National Bureau of Economic Research, Inc.
    18. Laurence Ball, 2014. "Long-term damage from the Great Recession in OECD countries," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(2), pages 149-160, September.
    19. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Hysteresis in unemployment," European Economic Review, Elsevier, vol. 31(1-2), pages 288-295.
    20. Dave Reifschneider & William Wascher & David Wilcox, 2015. "Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(1), pages 71-109, May.
    21. Sebastian Gechert & Gustav Horn & Christoph Paetz, 2019. "Long‐term Effects of Fiscal Stimulus and Austerity in Europe," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(3), pages 647-666, June.
    22. Alan J. Auerbach & Yuriy Gorodnichenko, 2017. "Fiscal Stimulus and Fiscal Sustainability," NBER Working Papers 23789, National Bureau of Economic Research, Inc.
    23. Gauti B. Eggertsson, 2011. "What Fiscal Policy Is Effective at Zero Interest Rates?," NBER Chapters, in: NBER Macroeconomics Annual 2010, volume 25, pages 59-112, National Bureau of Economic Research, Inc.
    24. Łukasz Rawdanowicz & Romain Bouis & Kei-Ichiro Inaba & Ane Kathrine Christensen, 2014. "Secular Stagnation: Evidence and Implications for Economic Policy," OECD Economics Department Working Papers 1169, OECD Publishing.
    25. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
    26. Furceri, Davide & Mourougane, Annabelle, 2012. "The effect of financial crises on potential output: New empirical evidence from OECD countries," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 822-832.
    27. Congressional Budget Office, 2017. "An Update to the Budget and Economic Outlook: 2017 to 2027," Reports 52801, Congressional Budget Office.
    28. repec:cbo:report:523701 is not listed on IDEAS
    29. Congressional Budget Office, 2017. "The Budget and Economic Outlook: 2017 to 2027," Reports 52370, Congressional Budget Office.
    30. J. Bradford DeLong & Lawrence H. Summers, 2012. "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 233-297.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Patrik Barisic & Tibor Kovac, 2022. "The effectiveness of the fiscal policy response to COVID-19 through the lens of short and long run labor market effects of COVID-19 measures," Public Sector Economics, Institute of Public Finance, vol. 46(1), pages 43-81.
    2. Valerie Cerra & Antonio Fatás & Sweta C. Saxena, 2023. "Hysteresis and Business Cycles," Journal of Economic Literature, American Economic Association, vol. 61(1), pages 181-225, March.
    3. Sohei Kaihatsu & Maiko Koga & Tomoya Sakata & Naoko Hara, 2019. "Interaction between Business Cycles and Economic Growth," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 37, pages 99-126, November.
    4. Antonio Fatás, 2019. "Fiscal Policy, Potential Output, and the Shifting Goalposts," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(3), pages 684-702, September.
    5. Paternesi Meloni, Walter & Romaniello, Davide & Stirati, Antonella, 2022. "Inflation and the NAIRU: assessing the role of long-term unemployment as a cause of hysteresis," Economic Modelling, Elsevier, vol. 113(C).
    6. Fragetta, Matteo & Tamborini, Roberto, 2019. "It's not austerity. Or is it? Assessing the effect of austerity on growth in the European Union, 2010-15," International Review of Economics & Finance, Elsevier, vol. 62(C), pages 196-212.
    7. Atanas Pekanov, 2018. "The New View on Fiscal Policy and its Implications for the European Monetary Union," WIFO Working Papers 562, WIFO.
    8. Dovern, Jonas & Zuber, Christopher, 2020. "How economic crises damage potential output – Evidence from the Great Recession," Journal of Macroeconomics, Elsevier, vol. 65(C).
    9. Abdoulaye Millogo, 2020. "Hysteresis Effects and Macroeconomics Gains from Unconventional Monetary Policies Stabilization," Cahiers de recherche 20-12, Departement d'économique de l'École de gestion à l'Université de Sherbrooke.
    10. Oscar Jorda & Alan Taylor & Sanjay Singh, 2019. "The Long-Run Effects of Monetary Policy," 2019 Meeting Papers 1307, Society for Economic Dynamics.
    11. Garga, Vaishali & Singh, Sanjay R., 2021. "Output hysteresis and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 871-886.
    12. Ambler, Steven & Cardia, Emanuela & Phaneuf, Louis, 1992. "Contrats de salaire, croissance endogène et fluctuations," L'Actualité Economique, Société Canadienne de Science Economique, vol. 68(1), pages 175-204, mars et j.
    13. Vítor Constâncio, 2020. "The Return of Fiscal Policy and the Euro Area Fiscal Rule," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(3), pages 358-372, September.
    14. Ulrike Malmendier & Leslie Sheng Shen, 2024. "Scarred Consumption," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(1), pages 322-355, January.
    15. Mendieta-Muñoz, Ivan, 2017. "On The Interaction Between Economic Growth And Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 21(4), pages 982-1022, June.
    16. Vítor Constâncio, 2020. "The return of fiscal policy and the euro area fiscal rule," Working Papers REM 2020/0127, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    17. Di Domenico, Lorenzo & Gahn, Santiago José & Romaniello, Davide, 2024. "Testing the Waters of Positive Hysteresis: The Effects of Autonomous Demand Shocks on Inflation, Accumulation, and Labor in the US Economy," Centro Sraffa Working Papers CSWP64, Centro di Ricerche e Documentazione "Piero Sraffa".
    18. Fatás, Antonio & Singh, Sanjay R., 2024. "Supply or demand? Policy makers’ confusion in the presence of hysteresis," European Economic Review, Elsevier, vol. 161(C).
    19. Dovern, Jonas & Zuber, Christopher, 2017. "The Effect of Recessions on Potential Output Estimates: Size, Timing, and Determinants," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168180, Verein für Socialpolitik / German Economic Association.
    20. Engler, Philipp & Tervala, Juha, 2018. "Hysteresis and fiscal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 39-53.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:13962. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.