Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/106148
Authors: 
Jordà, Òscar
Taylor, Alan M.
Year of Publication: 
2014
Series/Report no.: 
SAFE Working Paper Series 79
Abstract: 
After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government's shift to austerity policies in 2010 on subsequent growth.
Subjects: 
Rubin Causal Model
allocation bias
average treatment effect
booms
fiscal multipliers
identification
inverse probability weighting
local projection
matching
output fluctuations
propensity score
regression adjustment
slumps
JEL: 
C54
C99
E32
E62
H20
H5
N10
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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