A critique to the expansionary austerity (part III): empirical counter facts beyond theoretical weaknesses

Botta, Alberto and Tori, Daniele (2017). A critique to the expansionary austerity (part III): empirical counter facts beyond theoretical weaknesses. University of Greenwich.

Abstract

In two previous contributions published in this working paper series, we pointed out the theoretical fragilities of the expansionary austerity theory (EAT). In this paper, we develop our critique even further by integrating the above theoretical investigation with an econometric model testing for the effectiveness of the mechanisms at the basis of the EAT. We consider a sample of developed economies composed by both monetarily sovereign and non-monetarily sovereign countries. Our time spell runs from 2007 to 2016 since that we are interested to assess the solidity of the EAT postulates in the post-crisis period. Our findings reinforce the validity of our original critique, and are fully consistent with out theoretical model. Since 2007, the core mechanisms of the expansionary austerity theory were not at work, to say the least. Austerity measures did not provide any expansionary impulse to economic activity since that the “expectation”, “financial” and “external” channels were inactive at best, or they acted in the opposite direction with respect to what EAT advocates would have suggested. Further, austerity per se did not restore any sense of credibility about public finance solidity on financial markets. Rather, it exacerbated financial turbulences and speculation on the market for sovereign bonds. Interestingly, austerity measures delivered perverse results precisely in those non-monetarily sovereign countries where they were thought to be mostly effective.

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