Thursday, July 7, 2011


Pragmatic Capitalism
Cullen Roche

Interesting new paper out of the IMF (via Paul Krugman) that claims to have found evidence showing that austerity does not lead to future growth.  In the cases where growth did follow austerity, the link to the budget cuts appear to have been greatly exaggerated.  I would argue that this holds particularly true during a balance sheet recession:
“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 IMF documents, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new data set,our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.

Click here for a PDF of the IMF Report

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