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Wednesday, June 22, 2016

The Myth of Austerity and Growth

Noah Smith:

The Myth of Austerity and Growth: ...Five years ago, it was common to hear claims that too much government borrowing would hurt growth -- an idea known as expansionary austerity. Much of the research cited by the proponents of this theory was done by scholars at the International Monetary Fund. But during the past few years, there have been quite a few questions about the IMF’s past cheerleading for belt-tightening. ...
Some pieces of research seemed to support austerity policies. Work by economists Carmen Reinhart and Kenneth Rogoff ... purported to show that countries that borrowed more grew more slowly. ... Subsequent analysis ... showed that there isn’t any evidence that high debt causes low growth.
Another paper on the austerity side ... was a 2002 study by Olivier Blanchard and Roberto Perotti. ... That pro-austerity result contradicts a lot of other papers -- see here and here, for example -- but it was very influential in part because of the prestige of Blanchard...
But in recent years, Blanchard has shifted his stance. In a 2013 paper with Daniel Leigh, he showed that the IMF had been consistently wrong in its forecasts of the effects of austerity. ...
This paper isn’t a one-shot mea culpa. ...
There are still a few pro-austerity papers out there ... but they’re increasingly swimming against the tide of evidence. ...

    Posted by on Wednesday, June 22, 2016 at 09:39 AM in Economics, Fiscal Policy | Permalink  Comments (23)


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