fiscal austerity

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Does fiscal austerity affect public opinion?

Does fiscal austerity affect public opinion?

Public opinion matters, for at least two reasons. First, negative public opinion may jeopardise reforms and push governments to back-track, leading to risks for fiscal sustain- ability down the road. This may happen through elections (unpopular governments are voted out of office) but also through public pressure or the simple threat of losing elections down the road. Second, public opinion may matter on its own right. After all, one key ob- jective of economic policy should be to make citizens confident, satisfied with their life and trustful, which in turn helps the smooth functioning of public authorities. Public opin- ion, therefore, is important beyond the role that it plays in influencing electoral outcomes. So far, little is known on the economic determinants of public opinion and in particular on the role that fiscal austerity plays in influencing it. Several possible channels are conceivable at the theoretical level. Fiscal austerity may be regarded a negative shock to current spending, at least if consumers are not Ricardian, which may have a negative effect on confidence and life satisfaction. Such a loss in confidence and life satisfaction might also be reflected in less trust in governmental and European institutions. Alternatively, the public might perceive austerity as a necessary action to restore fiscal sustainability. Following this logic, trust in public institutions might increase, and uncertainty about future economic developments might decrease. Such a development could possibly also boost consumer confidence.
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Fiscal austerity versus growth in Croatia

Fiscal austerity versus growth in Croatia

nomic policies to recover economic growth because they may not deliver the expected result. Constantinos and Nellis (2013) provide a  critical assessment of austerity measures that are being imple- mented in crisis-stricken countries of the Eurozone; in particular, they discuss the implications of internal devaluation for the Greek economy. They challenge theoretical underpinnings and the expected impact of Greece’s pursuit of an internal devaluation policy under an austerity framework forced on the country by the so-called “troika” (the European Central Bank (ECB), the European Commission (EC), and the In- ternational Monetary Fund (IMF)). In their opinion, austerity measures should be relaxed. The contrac- tionary effects of fiscal policy should be eased and refocused on reducing unemployment by channeling public-sector spending toward viable, socially desir- able investment projects. There is also a need for cen- trally managed European fiscal policy to effectively transfer resources between richer and poorer regions, thus insulating member states from undesirable eco- nomic shocks. Their proposals to fundamentally re- form regional and industrial policies and to have the European Investment Bank immediately introduce a major program of investments—particularly in the most crisis-stricken economies of Europe’s southern region—by issuing euro bonds. This type of program will provide the leeway required for Europe’s distressed Southern economies and help them slowly return to the path to recovery. Finally, they make a strong ar- gument that the troika must immediately reconsider the enforcement of fiscal austerity and fiscal consolida- tion measures. They suggest an alternative economic approach aimed at emancipating the Greek economy from the crisis of the current economic system. This approach should seek to accomplish the following goals: (a) to renegotiate Greece’s existing loan agree- ment with the troika; (b) to establish an employment creation agenda through “employer of last resort” schemes; (c) to reconstruct and transform the existing banking system; and (d) to adopt a more flexible, more appropriate approach to the implementation of auster- ity and internal devaluation.
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Saving Europe? The unpleasant arithmetic of fiscal austerity in integrated economies

Saving Europe? The unpleasant arithmetic of fiscal austerity in integrated economies

Europe’s debt crisis casts doubt on the effectiveness of fiscal austerity in highly-integrated economies. Closed-economy models overestimate its effectiveness, because they underestimate tax-base elasticities and ignore cross-country tax externalities. In contrast, we study tax re- sponses to debt shocks in a two-country model with endogenous utilization that captures those externalities and matches the capital-tax-base elasticity. Quantitative results show that unilat- eral capital tax hikes cannot restore fiscal solvency in Europe, and have large negative (positive) effects at “home” (“abroad”). Restoring solvency via either Nash competition or Coopera- tion reduces (increases) capital (labor) taxes significantly, and leaves countries with larger debt shocks preferring autarky.
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The signaling role of fiscal austerity

The signaling role of fiscal austerity

1 Introduction In this paper, I investigate the role of fiscal austerity as a way to communicate a sovereign’s ability to honor the debt. Austerity is at the forefront of the public policy debate following the European sovereign debt crisis. It refers to a combination of measures that reduce a country’s deficit, hence, the debt burden. Most of the discussion about austerity measures revolved around the issue of debt sustainability (ECB, 2012; StLouisFED, 2012).However, a number of countries engaging in sizable austerity after 2010 were thought to be in the safe European “core.” For instance, Germany announced plans to reduce its budget deficit by 80 billion euros by 2014. The UK embarked on the biggest cuts in state spending since World War II, while the Netherlands also went through several austerity packages despite a relatively low ratio of debt to GDP. 1 The argument advocated by policymakers is that such
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The US Fiscal Crisis: The Debt Sustainability Delusion and the True Costs of Fiscal Austerity

The US Fiscal Crisis: The Debt Sustainability Delusion and the True Costs of Fiscal Austerity

The results reviewed above make it evident that dis- cussions about the long-run debt ratio and its sus- tainability are a delusion, because multiple long-run average debt ratios corresponding to very different patterns of future primary balances, which reflect structural changes in fiscal reaction functions, are equally sustainable. Moreover, this delusion also extends to the heated debate over fiscal stimulus v. fiscal austerity. The delusion here is in the belief that there is an alternative to the latter. There is not, because again, if fiscal solvency is to be maintained (i.e. if default is not an option), the 22.3 percentage points increase in the debt ratio that has already taken place between 2009 and 2011 requires a match- ing increase in the expected present discounted value of future primary fiscal balances. Thus, we can dis- cuss the time profile that primary balances ought to follow to produce this increase, which means, for example, that if we want to have larger deficits in early years, we must be willing to accept more- than-proportionally higher primary surpluses in future years (due to discounting), and a higher long- run average debt ratio, but austerity defined by the amount by which the expected present value of the primary balance needs to rise is unavoidable. Even if we allow for debt restructuring, unless we contem- plate a write-off equivalent to the full 22.3 percent- age points of the Great Recession debt shock, some degree of fiscal austerity will still be required to pro- duce the higher primary surpluses to match the debt shock net of restructuring.
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Fiscal austerity, unemployment and family firms

Fiscal austerity, unemployment and family firms

Abstract I calculate unemployment multipliers of fiscal consolidation policies in a standard, closed-economy New Keynesian framework with search and matching frictions, and, as an innovation, in the presence of sectoral heterogeneity. Family and non-family firms behave differently in the labor market and are differently managed. This latter assumption is modeled by the inclusion of intangible capital in the family sector. The model is calibrated to match European data on countries with a large percentage of family firms in the labor force. I find that fiscal austerity raises unemployment. Both at peak and cumulatively, unemployment reacts least when the budget is consolidated by increasing the rate of value-added tax. At peak, the highest increase in unemployment is induced by a cut in government consumption, but, cumulatively, a hike in employees’ labor income tax is just as costly in terms of employment. There are trade-offs, however, which a policymaker must face, as the value-added tax increase results in the steepest decline in consumption. Sectoral heterogeneity is crucial; multipliers of labor income tax policies and government consumption multipliers are usually biased downwards, while the consumption-tax multipliers are often biased upwards. Thus, ignoring sectoral heterogeneity might lead to incorrect policy conclusions.
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Slow recoveries through fiscal austerity: New insights in the effects of fiscal austerity

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

CONCLUSION Technology diffusion represents a crucial determinant of growth. Fostering the diffusion of innova- tive ideas constitutes a new objective of innovation policies. There is evidence that the establish- ment of applied research organizations, for example, contributes in an important way to the diffu- sion of technology and leads to significant productivity gains (Comin, Licht, Pellens & Schubert, 2018). However, little is known about the interaction between innovation policy, macroeconomic policy, and the business cycle. FRAME aims precisely at filling this gap by investigating how the speed of technology diffusion varies over the cycle and how it depends on macroeconomic policies. Work by Bianchi, Comin et al. (2019) shows that the effects of fiscal austerity on the adoption of new technologies can account for the slow recoveries after the Great Recession in Europe. Aus- terity measures taken in response to fiscal distress, as in Spain, Portugal, and Greece, slow down the adoption of new technologies and depress productivity growth in the medium run. Austerity is only advisable if it can reduce interest rate spreads quickly but this is unlikely for countries in severe financial distress.
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The short- and long-run damages of fiscal austerity: Keynes beyond Schumpeter

The short- and long-run damages of fiscal austerity: Keynes beyond Schumpeter

October 30, 2014 Abstract In this work we analyze the short- and long-run effects of fiscal austerity policies, employing an agent-based model populated by heterogeneous, boundedly-rational firms and banks. The model, in line with the family of “Keynes+Schumpeter” formalism, is able to account for a wide array of macro and micro empirical reg- ularities. In particular, it endogenously generates self-sustained growth patterns together with persistent economic fluctuations punctuated by deep downturns. On the policy side, we find that austerity policies considerably harm the economy, by increasing output volatility, unemployment, and the incidence of crises. In addi- tion, they depress innovation and the diffusion of new technologies, thus reducing long-run productivity and GDP growth. Finally, we show that “discipline-guided” fiscal rules are self-defeating, as they do not stabilize public finances, but, on the contrary, they disrupt them.
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Saving Europe? The unpleasant arithmetic of fiscal austerity in integrated economies

Saving Europe? The unpleasant arithmetic of fiscal austerity in integrated economies

Abstract What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore cross- country spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity uti- lization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong cross-country externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a “race to the bottom” in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria.
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Fiscal Austerity in Ambiguous Times

Fiscal Austerity in Ambiguous Times

Instrumental in the calculation of present values is the behavior of surpluses, and consequently of debt, in marginal utility units. Surpluses may fall in bad times, but contractions of output are accompanied by expansions in marginal utility and therefore a decrease in state-contingent returns. If the IES is lower than unity, then marginal utility and effectively interest rates are sufficiently responsive to shocks, leading to surpluses and debt in marginal utility units that are actually high in recessions and low in expansions. Since the present value of debt consists of the product of the pessimistic beliefs and debt in marginal utility units, high taxes in bad times and low taxes in good times, amplify, through the channel of pessimistic beliefs, the value of the high debt positions contingent on bad times and reduces the value of the low debt positions contingent on good times, increasing therefore the overall value of the government portfolio. The opposite happens when the IES is larger than unity: marginal utility is not responsive enough, leading to debt in marginal utility units that is procyclical. A procyclical tax rate then increases the value of the government portfolio. In the knife-edge case of a unitary IES, debt in marginal utility units is constant across the cycle, muting therefore the desire of the planner to increase the market value of debt by managing the pessimistic expectations of the household and leading to the same fiscal 1 The terms countercyclical and procyclical refer respectively to negative or positive correlation with output
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(Non-)Keynesian Effects of Fiscal Austerity: New Evidence from a Large Sample

(Non-)Keynesian Effects of Fiscal Austerity: New Evidence from a Large Sample

The influence of financial crises is likely to play a role when austerity and fiscal consolidations are being designed and implemented. While financial crises were not abundant in OECD countries prior to 2008 (although some significant crises took place in countries as Spain, the US, Finland, or Sweden before the “Great Recession”) there are enough cases to consider. In what follows, we rely on Laeven and Valencia (2013, 2018) database (which was recently updated and is publicly available) to assess whether the link between fiscal consolidations and private consumption and investment is different during such crises episodes. These episodes include precise dating for (systemic) banking crises, currency crises, debt crises and sovereign debt restructurings. Under an impaired credit channel (near to) zero-bound monetary policy (in more recent years) the link between these variables is likely to differ and this is a hypothesis worth investigating. From a policy perspective a relevant message can be extracted such as the need to prop up the financial sector to restore confidence and the channelling of savings to private investment thus favouring a non-Keynesian outcome of fiscal consolidations. Using a specification similar to the one in the previous section for the case of debt thresholds and by means of a dummy variable (crisis) for financial crises, we obtain the estimates in Table 7.
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(Non-)Keynesian effects of fiscal austerity: New evidence from a large sample

(Non-)Keynesian effects of fiscal austerity: New evidence from a large sample

The influence of financial crises is likely to play a role when austerity and fiscal consolidations are being designed and implemented. While financial crises were not abundant in OECD countries prior to 2008 (although some significant crises took place in countries as Spain, the US, Finland, or Sweden before the “Great Recession”) there are enough cases to consider. In what follows, we rely on Laeven and Valencia (2013, 2018) database (which was recently updated and is publicly available) to assess whether the link between fiscal consolidations and private consumption and investment is different during such crises episodes. These episodes include precise dating for (systemic) banking crises, currency crises, debt crises and sovereign debt restructurings. Under an impaired credit channel (near to) zero-bound monetary policy (in more recent years) the link between these variables is likely to differ and this is a hypothesis worth investigating. From a policy perspective a relevant message can be extracted such as the need to prop up the financial sector to restore confidence and the channelling of savings to private investment thus favouring a non-Keynesian outcome of fiscal consolidations. Using a specification similar to the one in the previous section for the case of debt thresholds and by means of a dummy variable (crisis) for financial crises, we obtain the estimates in Table 7.
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How long can austerity persist? The factors that sustain fiscal consolidations

How long can austerity persist? The factors that sustain fiscal consolidations

The role of push factors and pull factors in euro area countries To illustrate the insights from our work, we use our results to illustrate some of the challenges that lie ahead for some euro area countries that have embarked on a consolidation path during 2010-11. While, for several Member States the push factors are obvious, with high public debt levels, large deficits, high sovereign bond yields and rising interest burdens forcing governments to take strong action towards fiscal austerity, there are clear challenges too. This is particularly true for those countries suffering from twin deficits of large fiscal and current account imbalances and cumulated competitiveness problems. In this sense, Figure 2 shows survivor curves for the duration of the current fiscal consolidation efforts in countries under EU/IMF economic and financial programmes (Ireland, Greece and Portugal) as well as Spain and Italy. Figure 3 shows a decomposition of the factors affecting the estimated probability of a duration lasting at least five years. The probability estimates are based on the equation which includes the initial fiscal conditions – deficit, bond yields and interest payments – and macroeconomic capacity – current account, real effective exchange rate, recent credit developments and growth and inflation dynamics. To provide a common overview, the estimated starting point is 2010. The estimated probabilities that these countries will be able to maintain a sustained consolidation effort are generally quite low. That should not be a surprise: the estimates are derived from analysis of past experiences and previous examples of long-lasting consolidation are relatively rare, as Figure 1 highlighted. For example, from our sample, the unconditional probability of consolidation lasting longer than five years is under a half.
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Brazilian fiscal policy in perspective: From expansion to austerity

Brazilian fiscal policy in perspective: From expansion to austerity

of the poorest population grew more than that of the average strata, which might have deepened the distributive conflict, thereby leading to popular support for the government. 28 Given this scenario, was such a radical shift in fiscal policy really necessary? This question was a source of controversy during the electoral debates of 2014. Rousseff managed a very narrow victory (with a margin of only 3.5 million votes) over opposition candidate Aécio Neves. Within the opposition, the conventional narrative of simplistically attributing the roots of the country’s economic and fiscal problems to the economic policy mistakes of previous PT administrations gained ground—especially regarding fiscal irresponsibility, which undermined the credibility of economic agents. This conventional narrative echoed within influential sectors of society (market analysts, mass media channels, the justice department, audit offices, opposition politicians etc.). It also underpinned a defence of the theory of expansionist fiscal austerity, according to which the belief in austere fiscal policy and the commitment towards ensuring the sustainability of the public debt generates beneficial effects on the expectations of economic agents and, therefore, boosts investments and economic growth.
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The time for austerity: Estimating the average treatment effect of fiscal policy

The time for austerity: Estimating the average treatment effect of fiscal policy

Oscar Jord`a † Alan M. Taylor ‡ April 2014 Abstract After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government’s shift to austerity policies in 2010 on subsequent growth.
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Austerity and Distributional Policy

Austerity and Distributional Policy

discuss the institutional setting and show that property tax rates did not change. We also do not find any significant effects of the reform on capital nor current ex- penditures (see columns 8 to 10 of Table 7). Placebo tests for both expenditure and revenue categories show that treatment and control municipalities were on parallel trends before the reform (see Table D.4). To test whether the average expenditure effect is masking heterogeneous effects across different categories of expenditures, we estimate the impact of the fiscal rule on each one separately. Looking at various expenditure items rather than just at social transfers only allows us to take into account potential in-kind transfers which have been shown to matter for inequality (Aaberge et al., 2018). Out of the twelve subcategories of municipal expenditures, only tourism spending is reduced significantly with the other point estimates fluc- tuating around zero (see Figure C.4). Importantly, the two categories perhaps most associated with redistribution, social and education spending, are hardly affected, with the point estimate of social spending even being positive. Still, this null result might hide heterogeneity between high- and low-skilled mayors that could also ex- plain their differential political outcomes. To test this hypothesis, we estimate the heterogeneous treatment effect of high-skilled mayors for all spending categories. Table C.10 shows that there is no significant difference in any of the spending items. We conclude that the redistributive effect of more progressive income taxes is un- likely to be offset by adjustments on the expenditure side of local budgets.
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The "eternal character" of austerity meausres in European crisis policies. Evidences from the Fiscal Compact discourse in Austria

The "eternal character" of austerity meausres in European crisis policies. Evidences from the Fiscal Compact discourse in Austria

the European Commission and the European Court of Justice which indicates a shift of power from legislative to executive authorities and the judiciary. Following Colin Crouch’s conception of “post-democracy” (Crouch 2004, 2011) the process of the implementation of the European FC thus can be interpreted as an example of a post-democratic phenomenon: While on the surface all democratic institutions and rules are working properly, an increasing number of core political decisions is made “behind closed doors”, justified mainly with inherent economic necessities. Moreover economic experts in multiple roles continuously increase their impact on political discourse, and economic rationality is becoming the main guideline for policy-making (Lebaron 2006; Maesse 2015). The shift of power from political representatives, particularly members of national parliaments and the European Parliament to seemingly independent experts of the European Commission also manifests in the EU crisis policy in the aftermath of the economic crisis. Oberndorfer (2012) describes the process of a shift of power as “authoritarian constitutionalism” which led to a huge loss of democracy. The implementation of the European Fiscal Compact in Austria offers a good opportunity to analyze the austerity discourse in the EU, because as the social democrats also ratified the Treaty a variety of arguments in favor of the FC can be analyzed. It can be shown that the public discourse about economic policies in a period when economics is going through a crisis a potential “crisis of economics” is still dominated by “economic imaginaries” (implicitly) preferring austerity measures to active fiscal policies. The main purpose of this chapter thus is twofold. First, I will argue that the process of the implementation as well as the content of the Fiscal Compact can be interpreted as an example of a post-democratic development, which potentially hollows out and in the long term even endangers democracy in the EU. Second, based on the example of the Austria Fiscal Compact discourse it will be shown that the support of austerity policies particularly in public discourses often rests on moral arguments. Simultaneously, expansive fiscal policies are framed as an immoral and irresponsible behavior.
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The "eternal character" of austerity measures in European crisis policies: Evidences from the Fiscal Compact discourse in Austria

The "eternal character" of austerity measures in European crisis policies: Evidences from the Fiscal Compact discourse in Austria

5 Conclusion To sum up, the analysis of public discourse on the FC in Austrian leading newspapers showed that many of the potential consequences of the treaty were not discussed and criticism therefore remained on a rather superficial level. Particularly the policy implications and legal consequences hardly entered the debate whether from the supporters of from the critics of the FC. The French election campaign played an important role, particularly for the social democratic parties in Germany and Austria. Claims for growth strategies and re-negotiations of the FC initiated a debate about the prospective economic consequences of one- sided austerity measures. Nevertheless the analysis also showed that the FC was often justified as an immediate reaction to the debt crisis in order to calm the financial markets and hence austerity was often framed as positive or at least as the only possibility to prevent “economic irresponsible behavior” in periphery countries. The claim for a predictable policy with reference to seemingly economic necessities was hardly opposed by fundamental critique. This discursive imbalance induced a moral and in many cases derogatory discourse on “budgetary sinners” and “debt states”. In such a moral framing, austerity policies were discussed as necessary measures to punish and sanction immoral behavior of “heavily-indebted states”. The moralization of debt however also reflects the influential narrative of the “crisis countries” having “lived beyond their means”.
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Austerity and distributional policy

Austerity and distributional policy

We interpret our findings as the impact of austerity on distributional policy. Considering the introduction of the DSP as a case of austerity is natural because it necessarily required a fiscal adjustment in municipalities where the rule bound. Consistent with this interpretation, previous evidence shows that the DSP induces substantial fiscal consolidation (Chiades and Mengotto, 2015; Coviello et al., 2019; Grembi et al., 2016). Contextual details of the Italian economic situation of the time further reinforce our interpretation: the reform took place in the midst of a severe recession caused by the sovereign crisis, with Italian real GDP shrinking by 3% in 2012 and by 1.8% in 2013, while the central government cut transfer to municipalities in several occasions between 2009 and 2015 (see Figure B.1 and Marattin et al., 2019 for details). Both factors reduced municipal revenues making thus more difficult to comply with the rule without a fiscal adjustment. Furthermore, in these times the DSP, vertically imposed by the national administration upon
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Austerity and Private Debt

Austerity and Private Debt

The closest related work to this study is the paper by Bernardini and Peersman (2015). They find that the government spending multiplier is considerably larger in periods of private debt overhang. However, my paper departs from their study in two important dimensions. First, while Bernardini and Peersman (2015) focus on non-linear effects of government spending, I estimate private debt-dependent responses to fiscal consolida- tions which are a combination of tax-based and spending-based adjustments. It seems reasonable to assume that the effects of austerity measures differ from standard fiscal spending shocks, because fiscal consolidations are typically implemented under special circumstances or because they are particularly large (Born, Müller, and Pfeifer, 2015). Moreover, it is unclear that the effects of equally-sized expansion and tightening of fis- cal policy should be symmetric, especially in the face of borrowing constraints. Second, my analysis is based on a panel dataset, whereas Bernardini and Peersman (2015) focus on the US economy. Thus, I provide multi-country evidence for private debt-dependent responses to fiscal policy.
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