In a widely cited blog, @ojblanchard1 and @jzettelmeyer insist that fiscal austerity will be good for Italy: it will raise output; in contrast, stimulus will raise interest rates, causing output to fall. piie.com/blogs/realtime…. Can that be true?
Oddly, they do not refer to work by Daniel Leigh and IMF colleagues, who conclude there is no evidence of expansionary fiscal austerity. onlinelibrary.wiley.com/doi/abs/10.111….
Leigh also coauthored with @ojblanchard1, concluding that fiscal austerity can cause severe loss in output.
Leigh also coauthored with @ojblanchard1, concluding that fiscal austerity can cause severe loss in output.
In their latest, Leigh et al. find that even for countries with high sovereign risk, the premise has to be: a 1% fiscal consolidation will lead to a 1% contraction of GDP.
Also, without accompanying interest rates cuts and currency depreciation, austerity will hurt even more.
Also, without accompanying interest rates cuts and currency depreciation, austerity will hurt even more.
Put simply, since Italy cannot expect monetary easing, fiscal austerity--far from raising output--could cause a sharp output fall and raise the debt burden. Expecting that, markets will demand higher interest rates if there is fiscal austerity,
Especially now, when Italian GDP has stopped growing and unemployment is rising--and since the declining pace of global trade will heighten an Italian recession risk--austerity could set Italy into a downward economic spiral. bloomberg.com/opinion/articl…. Is this a risk worth taking?
