Tuesday 11
Christian Breuer
› 10:00 - 10:30 (30min)
› 607
Expansionary Austerity and Reverse Causality
Christian Breuer  1@  
1 : Chemnitz University of Technology  -  Website
Technische Universität Chemnitz, 09107 Chemnitz -  Germany

Empirical studies on the effects of fiscal policy using the conventional or data-based approach and the Blanchard-method of cyclical adjustment or the Blanchard Fiscal Impulse (BFI) find that fiscal consolidations can be expansionary, particularly in the case of spending-cuts. In this paper I state that this finding is affected by reverse causality, i.e. increasing GDP causally decreases expenditure-GDP-ratios if the cyclical adjustment strategy fails to correct for cyclical effects. I show that the BFI as used in the literature does not appropriately control for cyclical effects in the case of expenditure-GDP-ratios and the resulting CAPB is endogenously correlated with the economic cycle. Replicating one prominent example of literature on expansionary austerity and comparing both, results based on the BFI and results based on standard cyclical adjustment strategies, only the BFI-based results find expansionary effects of fiscal consolidations, while these effects disappear after applying standard methods of cyclical adjustment.

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