Does Austerity Pay Off?

  title={Does Austerity Pay Off?},
  author={Benjamin Born and Gernot M{\"u}ller and Johannes Pfeifer},
  journal={Review of Economics and Statistics},
Abstract We investigate empirically how fiscal shocks—unanticipated and exogenous changes of government consumption growth—affect the sovereign default premium. For this purpose, we assemble a new data set for 38 emerging and developed economies. It contains approximately 3,000 observations for the sovereign default premium and three alternative measures of fiscal shocks. We condition our estimates on whether shocks are positive or negative and initial conditions in terms of fiscal stress. An… 

Market discipline ? Sovereign spreads , fiscal adjustments , and political turnover ∗

How do sovereign default spreads influence macroeconomic policies? Do they have a disciplining effect on fiscal policy? How do they impact election outcomes? We rely on a large data set to address

The Worst of Both Worlds: Fiscal Policy and Fixed Exchange Rates

Under fixed exchange rates, fiscal policy is an effective tool. According to classical views because it impacts the real exchange rate, according to Keynesian views because it impacts output. Both

Sovereign Spreads and the Effects of Fiscal Austerity

Government Spending, Downward Wage Rigidity, and Exchange Rate Dynamics

In this paper, we show that government spending impacts the real exchange rate asymmetrically, depending on whether spending is raised or cut. We first consider an extension of the small open economy


We assess the impact of fiscal and monetary policy shocks on US survey-based consumer expectations within states of low and high public debt. Following an unexpected increase in government spending,

Slow recoveries through fiscal austerity: New insights in the effects of fiscal austerity

Several European countries such as Spain, Portugal, and Greece implemented austerity programs to cope with the government-debt crisis in the aftermath of the Great Recession: They increased taxes on

Public Spending Shocks , Systematic Monetary Policy , and the Consumption Crowding-In Puzzle

We study the drivers of increasing consumption after a government spending expansion—the “crowding-in puzzle”—using structural VARs and localprojections. While the marginal effect of the

The government spending multiplier, fiscal stress, and the zero lower bound

The recent sovereign debt crisis in the Eurozone was characterized by a monetary policy, which has been constrained by the zero lower bound (ZLB) on nominal interest rates, and several countries,



What Determines Government Spending Multipliers?

This paper studies how the effects of government spending vary with the economic environment. Using a panel of OECD countries, we identify fiscal shocks as residuals from an estimated spending rule

Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity

The authors propose and solve an optimizing model that explains counterintuitive effects of fiscal policy in terms of expectations. If government spending follows an upward-trending stochastic

Fiscal Stimulus Under Sovereign Risk

The excess procyclicality of fiscal policy is commonly viewed as a central malaise in emerging economies. We document that procyclicality is more pervasive in countries with higher sovereign risk and

Sovereign Risk, Fiscal Policy, and Macroeconomic Stability

This paper analyzes the impact of strained government finances on macroeconomic stability and the transmission of fiscal policy. Using a variant of the model by Curdia and Woodford (2009), we study a

How Big (Small?) are Fiscal Multipliers?

We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the

The Dynamics of Sovereign Debt Crises and Bailouts

Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government

Expansionary Austerity New International Evidence

This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine the historical record, including Budget Speeches and IMFdocuments, to

Fiscal Policy and Default Risk in Emerging Markets

Emerging market economies typically exhibit a procyclical fiscal policy: public expenditures rise (fall) in economic expansions (recessions), whereas tax rates rise (fall) in bad (good) times.

Fiscal austerity during debt crises

This paper constructs a dynamic model in which fiscal restrictions interact with government borrowing and default. The government faces fiscal constraints; it cannot adjust tax rates or impose