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

TY - UNPB

T1 - Expansionary contractions and fiscal free lunches: too good to be true?

AU - McManus, Richard

AU - Ozkan, Fatma Gulcin

AU - Trzeciakiewicz, Dawid

PY - 2019/11/4

Y1 - 2019/11/4

N2 - This paper builds a framework to jointly examine the possibilities of both expansionary fiscal contractions (austerity increasing output) and fiscal free lunches (expansions reducing government debt), arguments which in recent debates have been supported by the austerity and stimulus camps, respectively. 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 in order to be expansionary, and stimulus needs to be temporary, responsive, and well-targeted in order to lower debt. We conclude that neither is likely, especially during periods of economic distress.

AB - This paper builds a framework to jointly examine the possibilities of both expansionary fiscal contractions (austerity increasing output) and fiscal free lunches (expansions reducing government debt), arguments which in recent debates have been supported by the austerity and stimulus camps, respectively. 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 in order to be expansionary, and stimulus needs to be temporary, responsive, and well-targeted in order to lower debt. We conclude that neither is likely, especially during periods of economic distress.

KW - Austerity versus stimulus

KW - fiscal policy

KW - zero lower bound

UR - https://www.scopus.com/pages/publications/85056416569

U2 - 10.1111/sjoe.12269

DO - 10.1111/sjoe.12269

M3 - Working paper

VL - 121

T3 - Scandinavian Journal of Economics

SP - 32

EP - 54

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

PB - Scandinavian Journal of Economics

ER -