econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 13 December 2016

Austerity: Three Wrongs Meet One Euro

by Constantin Gurdgiev, TrueEconomics.Blogspot.in

"Is it the 'How' or the 'When' that Matters in Fiscal Adjustments?" asks a recent NBER Working Paper (NBER Working Paper No. w22863). The authors, Alberto Alesina, Gualtiero Azzalini, Carlo A. Favero and Francesco Giavazzi ask a rather interesting and highly non-trivial question.

euro.bill.bundles.380x190

Much of recent debate about the austerity in the post-GFC world have focused on the timing of fiscal tightening. The argument here goes as follows: the Government should avoid tightening the pursue strings at the time of economic contraction or slowdown. Under this thesis, austerity has been the core cause of the prolonged and deep downturn in the euro area, as compared to to other economies, because austerity in the euro area was brought about during the downturn part of the business cycle.

However, there is an alternative view of the austerity impact. This view looks at the type of austerity policies being deployed. Here, the argument goes that austerity can take two forms: one form - that of reduced Government spending, another form - that of increased taxation.

There is some literature on the analysis of the effects of the two types of austerity compared to each other. But there is no literature, as far as I am aware, that looks at the impact of austerity across different types, while controlling for the timing of austerity policies implementation.

The NBER paper does exactly that. And it uses data from 16 OECD economies covering time period of 1981 through 2014 - allowing for both heterogeneity amongst economic systems and cycles, as well as full accounting of the most recent Great Recession experiences.

The authors "find that the composition of fiscal adjustments is much more important than the state of the cycle in determining their effects on output." So that the 'How' austerity is structured is "much more important" in determining its effects than the 'When' austerity is introduced.

More specifically, "adjustments based upon spending cuts are much less costly than those based upon tax increases regardless of whether they start in a recession or not." This is self explanatory.

But there is an added kicker (emphasis is mine):

[the overall] "results appear not to be systematically explained by different reactions of monetary policy. However, when the domestic central bank can set interest rates -- that is outside of a currency union -- it appears to be able to dampen the recessionary effects of tax-based consolidations implemented during a recession."

Now, here is a clear cut evidence of just how disastrous the euro has been for the real economies in Europe during the current crisis. As the authors note, correctly, "European austerity... was mostly tax based and implemented within a currency union". In other words, Europe choose the worst possible type of austerity (tax-based), implemented in the worst possible period (during a recession) and within the worst possible monetary regime (common currency zone).

In allegorical terms, the euro zone was like a food-starved runner starting a marathon by shooting himself in a knee.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Opinion Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Opinion


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Minsky’s Theory of Asset Prices: Why Minsky Was NOT a Neo-Monetarist
The BuildZoom And Urban Economics Lab Index: Third Quarter 2016
News Blog
January 2017 Philly Fed Manufacturing Survey Significantly Improves and Remains In Expansion.
December 2016 Residential Building Sector Mixed
14 January 2017 Initial Unemployment Claims Rolling Average Improvement Continues
Stock Market Bull Faces Important Test
Infographic Of The Day: Movies That Struck Oil
Early Headlines: Asia Stocks Mixed, Dollar Steady, Oil Up, Top US Poll Priority Is Health Care, Tough Questions For Tom Price, Russia Has Buyer's Remorse, Mexico Fears Trump And More
Documentary Of The Week: Value And Thermodynamics
Can Serena Make It 23
Number Of Bitcoin ATMs By Country
How Old Is Our Moon?
Advantages And Disadvantages Of The EU According To Business Leaders
What We Read Today 18 January 2017
January 2017 Beige Book: Reading Between The Lines - Little Change in the Rate of Growth
Investing Blog
Technical Nuggets: Is There A Trump-Air Pocket Ahead?
Technical Thoughts: Three Trading Ideas
Opinion Blog
A New Deal With Capitalism Requires A Revolution In Politics And Markets
A Letter To Warren Buffett And Charlie Munger About Hiring Proven Whistleblowers
Precious Metals Blog
Four Catalysts Drive Gold And Silver For 2017
Live Markets
19Jan2017 Pre-Market Commentary: Wall Street To Open Flat, Building Permits Down, Philadelphia Fed Manufacturing Up, Jobless Claims Down
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved