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PKSG Working Paper Series

Working Paper PKWP1511

The theoretical weaknesses of the expansionary austerity doctrine

December 2015

Alberto Botta

The existing criticism to the expansionary austerity theory has extensively addressed the methodological problems affecting the econometric techniques underpinning it, and hence the solidity of its empirical findings. Relatively fewer efforts have been spent in showing the theoretical inconsistencies of the expansionary austerity literature, i.e. the rather extreme assumptions and circumstances under which an expansionary fiscal correction episode might effectively materialize. In this paper, we try to further develop this second type of critique. We first present some stylized facts that seem to contradict the central pillars of the expansionary austerity building. We then move to the theory and provide a detailed analysis of the specific policy measures expansionary austerity supporters advocate to compose possibly successful austerity packages. We do so through a simple short-run model. We show that fiscal consolidation might have expansionary outcomes only under extreme, very specific and uncertain conditions. Expansionary austerity would hardly take place in the context of monetarily sovereign economies, or in presence of an accommodative monetary policy like that implemented by the ECB since late 2011, or into economic systems that are poorly integrated on international goods markets and cannot manage their own exchange rate freely.

Keywords: Fiscal policy, expansionary austerity theory, post-Keynesian macro models

JEL classification: E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian E61: Policy Objectives; Policy Designs and Consistency; Policy Coordination E62: Fiscal Policy

Download: Working Paper PKWP1511