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The short- and long-run inconsistency of the expansionary austerity theory: A post-Keynesian/Evolutionist critique

The short- and long-run inconsistency of the expansionary austerity theory: A post-Keynesian/Evolutionist critique

Botta, Alberto (2018) The short- and long-run inconsistency of the expansionary austerity theory: A post-Keynesian/Evolutionist critique. Journal of Evolutionary Economics. ISSN 0936-9937 (Print), 1432-1386 (Online) (In Press) (doi:https://doi.org/10.1007/s00191-018-0567-3)

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Abstract

This work provides a critical analysis of the expansionary austerity theory (EAT). The focus is on the theoretical weaknesses of the EAT—the extreme circumstances and fragile assumptions under which expansionary consolidations might take place. The paper presents a simple theoretical model based on both the post-Keynesian and the evolutionary/institutionalist schools. First, it shows that well-designed austerity measures hardly trigger short-run economic expansions in the context of expected long-lasting consolidation plans dealing with remarkably high debt-to-GDP ratios, when the so-called “financial channel” is not operative (i.e. in the context of monetarily sovereign economies), or when the degree of export responsiveness to internal devaluation is low. Even in the context of non–monetarily sovereign countries (e.g. members of the eurozone), austerity’s effectiveness crucially depends on its highly disputable capacity to immediately stabilize fiscal variables.

The paper then analyses some possible long-run economic dynamics. Path dependency and cumulativeness make the short-run effects of fiscal consolidation elements of paramount importance to (hopefully) obtaining any medium-to-long-run benefit. Should these effects be even slightly contractionary, short-run costs can breed an endless spiral of recession and ballooning debt in the long run. If so, in the case of non–monetarily sovereign countries debt forgiveness may emerge as the ultimate solution to restore economic soundness. Alternatively, institutional innovations like those adopted since mid-2012 by the European Central Bank are required to stabilize the economy, even though they are unlikely to restore rapid growth in the absence of more active fiscal stimuli.

Item Type: Article
Additional Information: © The Author(s) 2018. Open Access. This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.
Uncontrolled Keywords: Fiscal policy; Expansionary austerity theory; Post-Keynesian/Evolutionist macro models
Subjects: H Social Sciences > HB Economic Theory
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of International Business & Economics
Related URLs:
Last Modified: 01 Jul 2019 11:30
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: GREAT b
Selected for GREAT 2019: GREAT 4
URI: http://gala.gre.ac.uk/id/eprint/18319

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