Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/145681
Authors: 
Klein, Mathias
Year of Publication: 
2016
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2016: Demographischer Wandel - Session: Panel Macroeconometrics C01-V2
Abstract: 
Based on a panel of OECD countries, I provide empirical evidence that the costs of austerity crucially depend on the level of private indebtedness. In particular, fiscal consolidations lead to severe contractions when implemented in high private debt states. Contrary, fiscal consolidations have no significant effect on economic activity when private debt is low. These results are robust for alternative definitions of private debt overhang, the composition of fiscal consolidations and controlling for the state of the business cycle and government debt overhang. Private debt-dependent responses are mainly driven by household debt, whereas the effects differ only slightly with the level of corporate debt. Moreover, in high private debt states austerity induces a substantial fall in house prices. Both of these latter findings indicate that deterioration in household balance sheets are important to understand private debt-dependent effects of austerity. One possible implication of this paper is that the negative effects of large-scale fiscal consolidations undertaken by Southern European countries were likely to be amplified by the high private debt burdens in these economies.
JEL: 
C23
E32
E62
Document Type: 
Conference Paper

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