Contractionary Fiscal Contraction, Quantified: European Edition

From Deutsche Bank, “Fighting the Clock,” Fixed Income (May 2012) [not online], some estimates of changes in structural balances, multipliers, and output impacts:

contractfisccontract.png
Note: a negative sign under “change in structural balance” indicates an increase in the surplus.Note that these are multipliers for composites of transfers, taxes, and spending on goods and services. Multipliers for pure spending on goods and services (government consumption) would be larger. (Just an observation — these are not guesses from ivory-tower bound academics, but from business sector economists.)

A recent IMF working paper by Corsetti, Meier and Mueller notes:

This paper studies how the effects of government spending vary with the economic environment. Using a panel of OECD countries, we identify fiscal shocks as residuals from an estimated spending rule and trace their macroeconomic impact under different conditions regarding the exchange rate regime, public indebtedness, and health of the financial system. The unconditional responses to a positive spending shock broadly confirm earlier findings. However, conditional responses differ systematically across exchange rate regimes, as real appreciation and external deficits occur mainly under currency pegs. We also find output and consumption multipliers to be unusually high during times of financial crisis.

The findings in this paper suggest that fiscal contraction will be particularly contractionary in the current-day eurozone. They also indicate that if policymakers come to their senses abandon the current approach of trying to stabilize via austerity, and instead aim for stimulus with back-loaded fiscal retrenchment, the ongoing recession could be mitigated.

This post originally appeared at Econbrowser and is posted with permission.

2 Responses to "Contractionary Fiscal Contraction, Quantified: European Edition"

  1. historysquared   June 14, 2012 at 2:03 pm

    Aggregate government spending is still rising across Europe. Politicians have promised spending cuts, but not followed through. Bu they have raised taxes. Perhaps if governments were to cut waste and enact reform – once no longer enabled by the ECB – expectations of higher actual and inflation tax rates in the future, would lead to long term investments that will pay off. You can't get drunk (on credit) without a hangover.

  2. historysquared   June 14, 2012 at 2:05 pm

    poorly written, I apologize. should have read:

    – *reduced* expectations of higher actual and inflation tax rates in the future, would lead to long term investments that will pay off in lieu of government largess.