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The theoretical weaknesses of the expansionary austerity doctrine

The theoretical weaknesses of the expansionary austerity doctrine

Botta, Alberto (2016) The theoretical weaknesses of the expansionary austerity doctrine. [Working Paper]

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Abstract

In this paper, we provide a critical analysis of the theory of the expansionary austerity. We take the hotly debated contribution by Carmen Reinhart and Kenneth Rogoff on the supposedly negative relationship between public debt and economic growth (when the debt-to-GDP ratio overcomes the 90 percent threshold) as the starting point of our analysis. We then move to analyze those contributions that more directly point to the possible expansionary outcomes of tough fiscal retrenchments. We eventually criticize the main conclusions of the expansionary austerity theory by presenting a simple short-run theoretical model. We show that fiscal consolidation might have expansionary outcomes only under extreme, very specific and uncertain circumstances. Expansionary austerity would hardly take place in the context of monetarily sovereign economies, or in presence of an accommodative monetary policy like that implemented by the ECB since late 2011, or in economic systems that are poorly integrated to international goods markets.

Item Type: Working Paper
Uncontrolled Keywords: fiscal policy; expansionary austerity theory; post-Keynesian macro models;
Subjects: H Social Sciences > HC Economic History and Conditions
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Greenwich Political Economy Research Centre (GPERC)
Last Modified: 09 Feb 2017 12:31
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
URI: http://gala.gre.ac.uk/id/eprint/14446

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