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Austerity Measures: Do they avert solvency crises?

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Abstract

Many countries are adopting austerity measures, whereby governments aggressively raise taxes, with the hope to dispel future solvency crisis. This paper investigates the implications of austerity on the likelihood of solvency crisis. We derive the maximum level of debt consistent with solvency, labelled as the effective fiscal limit on debt, and we show that its position depends on austerity. We find that countries like Italy that undergo strict austerity could lower their effective fiscal limit and induce a solvency crisis in the near future.

Suggested Citation

  • Christos Shiamptanis, 2017. "Austerity Measures: Do they avert solvency crises?," LCERPA Working Papers 0103, Laurier Centre for Economic Research and Policy Analysis, revised 19 Jun 2017.
    • Handle: RePEc:wlu:lcerpa:0103
    Note: LCERPA Working Paper No. 2017-6
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    References listed on IDEAS

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    1. Huixin Bi & Eric M. Leeper & Campbell Leith, 2013. "Uncertain Fiscal Consolidations," Economic Journal, Royal Economic Society, vol. 0, pages 31-63, February.
    2. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
    3. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122, National Bureau of Economic Research, Inc.
    4. Cristina Arellano & Yan Bai, 2017. "Fiscal austerity during debt crises," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 657-673, December.
    5. Bi, Huixin, 2012. "Sovereign default risk premia, fiscal limits, and fiscal policy," European Economic Review, Elsevier, vol. 56(3), pages 389-410.
    6. Daniel, Betty C. & Shiamptanis, Christos, 2013. "Pushing the limit? Fiscal policy in the European Monetary Union," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2307-2321.
    7. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    8. Daniel, Betty C. & Shiamptanis, Christos, 2012. "Fiscal risk in a monetary union," European Economic Review, Elsevier, vol. 56(6), pages 1289-1309.
    9. Betty Daniel, Christos Shiamptanis, 2015. "Predicting Sovereign Fiscal Crises: High-Debt Developed Countries," LCERPA Working Papers 0090, Laurier Centre for Economic Research and Policy Analysis, revised 05 May 2015.
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    More about this item

    Keywords

    Austerity; Solvency Crisis; Fiscal Policy; Fiscal Limit; Default;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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