Interesting new paper out of the IMF (via Paul Krugman) that claims to have found evidence showing that austerity does not lead to future growth. In the cases where growth did follow austerity, the link to the budget cuts appear to have been greatly exaggerated. I would argue that this holds particularly true during a balance sheet recession:
“This paper investigates the short-term effects of fiscal consolidation on economic activity inOECD economies. We examine the historical record, including Budget Speeches and IMFdocuments, to identify changes in fiscal policy motivated by a desire to reduce the budgetdeficit and not by responding to prospective economic conditions. Using this new dataset,our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policystance used in the literature support the expansionary fiscal contractions hypothesis butappear to be biased toward overstating expansionary effects.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.