Can countries heavily in debt ‘afford’ fiscal stimulus in the right circumstances: Hint– probably

Fiscal Stimulus and Fiscal Sustainability
by Alan J. Auerbach, Yuriy Gorodnichenko – #23789 (EFG PE)

Abstract:

The Great Recession and the Global Financial Crisis have left many developed countries with low interest rates and high levels of public debt, thus limiting the ability of policymakers to fight the next recession. Whether new fiscal stimulus programs would be jeopardized by these already heavy public debt burdens is a central question. For a sample of developed countries, we find that government spending shocks do not lead to persistent increases in debt-to-GDP ratios or costs of borrowing, especially during periods of economic weakness. Indeed, fiscal stimulus in a weak economy can improve fiscal sustainability along the metrics we study. Even in countries with high public debt, the penalty for activist discretionary fiscal policy appears to be small.

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One Response to Can countries heavily in debt ‘afford’ fiscal stimulus in the right circumstances: Hint– probably

  1. derrida derider says:

    The Great Recession and the Global Financial Crisis have left many developed countries with low interest rates and high levels of public debt, thus [my emphasis] limiting the ability of policymakers to fight the next recession

    Gee, talk about petitio principi. Shouldn’t the bit about limiting ability to fight the next recession be what the paper is supposed to demonstrate rather than assume?

    I haven’t read the paper yet, but Auerbach is a very long term deficit hawk, the original austerian. He was a prominent predictor of catastrophe during the Bush1 and Clinton eras – only then it was all about unsustainability of future taxes (he was a pioneer of the ‘intergenerational accounting’ approach), rather than about constraints on countercyclical policy. Of course that does not mean he is wrong; on past form I would expect the paper to be technically very competent. But we should be aware of his likely strong priors.

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