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

Research output: Working paper/PreprintWorking paper

Richard McManus, Fatma Gulcin Ozkan, Dawid Trzeciakiewicz

Original languageEnglish
PublisherScandinavian Journal of Economics
Pages32-54
Number of pages23
Volume121
DOIs
Published4 Nov 2019

Publication series

NameScandinavian Journal of Economics
ISSN (Print)0347-0520

King's Authors

Abstract

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.

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