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Expansionary contractions and fiscal free lunches: too good to be true?

Author

Listed:
  • Richard McManus
  • F. Gulcin Ozkan
  • Dawid Trzeciakiewicz

Abstract

This paper builds a framework to jointly examine the possibility of both ‘expansionary fiscal contractions’ (austerity increasing output) and ‘fiscal free lunches’ (expansions reducing government debt), arguments supported by the austerity and stimulus camps, respectively, in recent debates. We propose a new metric quantifying the budgetary implications of fiscal action, a key aspect of fiscal policy particularly at the monetary zero lower bound. We find that austerity needs to be highly persistent and credible to be expansionary, and stimulus temporary, responsive and well-targeted in order to lower debt. We conclude that neitherare likely, especially during periods of economic distress.

Suggested Citation

  • Richard McManus & F. Gulcin Ozkan & Dawid Trzeciakiewicz, 2015. "Expansionary contractions and fiscal free lunches: too good to be true?," Discussion Papers 15/28, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:15/28
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    References listed on IDEAS

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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. Richard McManus, 2018. "Fiscal Trade‐Offs: The Relationship Between Output and Debt in Policy Interventions," Manchester School, University of Manchester, vol. 86(S1), pages 50-82, September.

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    More about this item

    Keywords

    fiscal austerity; expansionary contractions; fiscal free lunch; zero lower bound.;
    All these keywords.

    JEL classification:

    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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