Expansionary Fiscal Consolidations: Theoretical Underpinnings and their Implications for the Eurozone

Pasquale Foresti, Ugo Marani

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

This paper deals with theoretical foundations justifying alleged expansionary effects of fiscal consolidations. In some European countries there have been episodes of fiscal retrenchments followed by an increase in output (Sweden, Ireland, Denmark, and Finland). These have been taken as a starting point for theories advocating, contrary to the Keynesian tradition, the possibility of a negative sign of the fiscal multiplier. We show that expansionary fiscal consolidations can occur under extreme circumstances: they are not the result of pure fiscal policies, but rather they result from a policy mix in which the central bank's behaviour is crucial. On the basis of this evidence we discuss why, given the current economic scenario, immediate austerity cannot be a plausible way out from the recession in the euro-area countries.
Original languageEnglish
Pages (from-to)19-33
Number of pages15
JournalContributions to Political Economy
Volume33
Issue number1
DOIs
Publication statusPublished - 2 Jun 2014

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