Expansionary Contractions and Fiscal Free Lunches: Too Good to Be True?

23 Pages Posted: 28 Jan 2019

See all articles by Richard McManus

Richard McManus

Canterbury Christ Church University College

F. Gulcin Ozkan

University of York

Dawid Trzeciakiewicz

Loughborough University

Date Written: January 2019

Abstract

This paper builds a framework to jointly examine the possibilities of both expansionary fiscal contractions (austerity increasing output) and fiscal free lunches (expansions reducing government debt), arguments which in recent debates have been supported by the austerity and stimulus camps, respectively. We propose a new metric quantifying the budgetary implications of fiscal action, a key aspect of fiscal policy particularly at the monetary zero lower bound. We find that austerity needs to be highly persistent and credible in order to be expansionary, and stimulus needs to be temporary, responsive, and well‐targeted in order to lower debt. We conclude that neither is likely, especially during periods of economic distress.

Keywords: Austerity versus stimulus, fiscal policy, zero lower bound

Suggested Citation

McManus, Richard and Ozkan, F. Gulcin and Trzeciakiewicz, Dawid, Expansionary Contractions and Fiscal Free Lunches: Too Good to Be True? (January 2019). The Scandinavian Journal of Economics, Vol. 121, Issue 1, pp. 32-54, 2019, Available at SSRN: https://ssrn.com/abstract=3322813 or http://dx.doi.org/10.1111/sjoe.12269

Richard McManus (Contact Author)

Canterbury Christ Church University College ( email )

North Holmes Road
Canterbury, Kent CT1 1QU
United Kingdom

F. Gulcin Ozkan

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

Dawid Trzeciakiewicz

Loughborough University ( email )

Epinal Way
Loughborough, LE11 3TU
Great Britain

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