Is fiscal austerity really self‐defeating?

Abstract

This paper analyzes local and global equilibrium dynamics in an optimizing endogenous growth model under expenditure-based fiscal austerity feedback policies expressed relative to the private capital stockprescribing spending cuts in reaction to public debt accumulation. Because the present value of equilibrium primary surpluses turns to be a nonlinear function of debt, two steady state equilibria are shown to emerge, one exhibiting low debt and high growth, one exhibiting high debt and low growth. Local analysis reveals that the low-debt/high-growth steady state is saddle-path stable while the high-debt/low-growth steady state is unstable-the latter thus indicating the possibility of self-defeating austerity, characterized by off-equilibrium upward spirals in debt because of persistent policy-induced adverse effects on growth divi-α 1−

Endogenous capital stock and depreciation in the United States

“…An important question in public finance is whether taxing capital can lead to lower investment and lower capital stock, also affecting the economic growth rate (Kang & Ye, 2019; Lu & Chen, 2015; Piergallini, 2021; Renström & Spataro, 2021; Suzuki, 2021). In this paper we draw on the theoretical apparatus underlying the fundamental equation of capital theory.…”