Expansionary contractions and fiscal free lunches: Too good to be true?
journal contributionposted on 2018-07-03, 10:09 authored by Richard McManus, Gulcin Ozkan, Dawid TrzeciakiewiczDawid Trzeciakiewicz
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 neither are likely, especially during periods of economic distress.
- Business and Economics