Austerity in 2009-2013

58 Pages Posted: 12 Jan 2015 Last revised: 29 May 2023

See all articles by Alberto F. Alesina

Alberto F. Alesina

Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Omar Barbiero

Harvard University

Carlo A. Favero

Bocconi University - Department of Economics; Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Francesco Giavazzi

National Bureau of Economic Research (NBER); University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); Centre for Economic Policy Research (CEPR)

Matteo Paradisi

Einaudi Institute for Economics and Finance (EIEF)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2015

Abstract

The conventional wisdom is (i) that fiscal austerity was the main culprit for the recessions experienced by many countries, especially in Europe, since 2010 and (ii) that this round of fiscal consolidation was much more costly than past ones. The contribution of this paper is a clarification of the first point and, if not a clear rejection, at least it raises doubts on the second. In order to obtain these results we construct a new detailed "narrative" data set which documents the actual size and composition of the fiscal plans implemented by several countries in the period 2009-2013. Out of sample simulations, that project output growth conditional only upon the fiscal plans implemented since 2009 do reasonably well in predicting the total output fluctuations of the countries in our sample over the years 2010-13 and are also capable of explaining some of the cross-country heterogeneity in this variable. Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13. Finally we examine whether this round of fiscal adjustments, which occurred after a financial and banking crisis, has had different effects on the economy compared to earlier fiscal consolidations carried out in "normal" times. When we test this hypothesis we do not reject the null, although in some cases failure to reject is marginal. In other words, we don't find sufficient evidence to claim that the recent rounds of fiscal adjustment, when compared with those occurred before the crisis, have been especially costly for the economy.

Suggested Citation

Alesina, Alberto F. and Barbiero, Omar and Favero, Carlo A. and Giavazzi, Francesco and Giavazzi, Francesco and Paradisi, Matteo, Austerity in 2009-2013 (January 2015). NBER Working Paper No. w20827, Available at SSRN: https://ssrn.com/abstract=2548346

Alberto F. Alesina (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
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United States
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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Omar Barbiero

Harvard University ( email )

Cambridge, MA
United States

Carlo A. Favero

Bocconi University - Department of Economics ( email )

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Italy

Bocconi University - Department of Finance ( email )

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Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Francesco Giavazzi

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3304 (Phone)
+39 02 5836 3302 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Matteo Paradisi

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana, 62
Rome, 00187
Italy

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