DP9476 | Fiscal consolidation: austerity and alternatives

Publication Date

12/05/2013

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Abstract

We study the path of the debt/output ratio during Fiscal Consolidation first when there is no demand failure and output matches exogenously growing supply throughout; then, in a time of recession, when expenditure cuts reduce demand so growth slows and debt/output ratios rise further and faster. As the correlation between slow growth and high debt arises from demand weakness, faster consolidation would prove counter-productive, ceteris paribus. Better, according to DeLong and Summers, that fiscal consolidation efforts be state contingent | allowing room for economic stabilisation; or, as Shiller has argued, that debt itself be state contingent, being indexed to GDP.