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Austerity in the Aftermath of the Great Recession

Author

Listed:
  • Christopher L. House

    (University of Michigan & NBER)

  • Christian Proebsting

    (Ecole Polytechnique Federale de Lausanne)

  • Linda L. Tesar

    (University of Michigan & NBER)

Abstract

Cross-country differences in austerity, defined as government purchases below forecast, account for 75 percent of the observed cross-sectional variation in GDP in advanced economies during 2010-2014. Statistically, austerity is associated with lower GDP, lower inflation and higher net exports. A multi-country DSGE model calibrated to 29 advanced economies generates effects of austerity consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity was so contractionary that debt-to-GDP ratios in some countries increased as a result of endogenous reductions in GDP and tax revenue.

Suggested Citation

  • Christopher L. House & Christian Proebsting & Linda L. Tesar, 2019. "Austerity in the Aftermath of the Great Recession," Working Papers 672, Research Seminar in International Economics, University of Michigan.
    • Handle: RePEc:mie:wpaper:672
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    File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers651-675/r672.pdf
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    More about this item

    Keywords

    Austerity; Fiscal Policy; Multi-Country DSGE Model;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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