Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/203278
Authors: 
Curatola, Giuliano
Donadelli, Michael
Gioffré, Alessandro
Grüning, Patrick
Year of Publication: 
2015
Series/Report no.: 
SAFE Working Paper No. 56
Abstract: 
Recent empirical evidence suggests that during the last years fiscally weak European countries significantly cut their R&D budgets in an effort to reduce their deficit, according to the spirit of the Fiscal Compact. We propose a general equilibrium model that endogenously captures the trade-off between costs and benefits of austerity measures driven by a zero-deficit policy. Our analysis suggests that cuts in R&D spending undermine economic growth both in the short and the long run. We use our model to estimate the reduction of economic growth due to R&D cuts implemented by fiscally weak European countries during the period 2010-2012. The model predicts a reduction in real growth by 0:63%, 2:93%, and 4:46%, in the next 1, 5, and 10 years, respectively. Moreover, we show that the zero-deficit constraint hampers economic growth in the presence of either a productivity drop or a spending stimulus.
Subjects: 
Austerity Measures
Fiscal Policy
Endogenous Growth
R&D
JEL: 
E21
E23
E62
G18
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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