The theoretical and empirical fragilities of the expansionary austerity theory

Botta, Alberto and Tori, Daniele (2018). The theoretical and empirical fragilities of the expansionary austerity theory. Journal of Post Keynesian Economics, 41(3) pp. 364–398.



Criticism to expansionary austerity theory has extensively addressed the methodological problems affecting the econometric techniques that underpin it; however, few efforts have formally analysed its theoretical strictures. In this paper we develop a more general and comprehensive critique, both from a theoretical and from an empirical perspective. We first present a short-run model that formally describes the theoretical background of specific policy measures advocated by expansionary austerity supporters. We show how these measures might only have expansionary outcomes under extreme and unrealistic conditions. We then move to the data, and provide an econometric analysis of the key variables that leave the results of our theoretical model undetermined; our findings reinforce the validity of our theoretical critique. Since 2007, when an important opportunity to test expansionary austerity presented itself with the recession, the core mechanisms of expansionary austerity theory seem to not have been working, to say the least. In fact, austerity measures delivered perverse results precisely in the countries where they were expected to be most effective.

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