Small Fiscal Multipliers Do Not Justify Austerity: A Macroeconomic Accounting Analysis of Public Debt-to-GDP Dynamics

Abstract

In the aftermath of a crisis which has now been lasting for more than five years, the debate about the size of fiscal multipliers arouse. Whatever the estimation approach, fiscal multipliers assumed for projections are the result of extrapolations from time series data. The present contribution aims at taking a different perspective, by answering the following question: is it really necessary to know the value of fiscal multipliers to take sensible policy decisions?

Public debt in Colombia: a post-Keynesian and institutionalist analysis

“…Lerner took the Keynesian idea of aggregate demand with the state finance theory, to argue that public expenditure policies should be measured only by the effectiveness in achieving full employment without undermining macroeconomic stability. Different PK views on this topic, such as Godley and Lavoie (2007), Ciccone (2013) or Garbellini (2016) arrive at the same conclusion: there is a level of public expenditure such as to achieve both full employment and sustainability of public debt -or, putting the emphasis on sustainability, public debt is sustainable if expenditures pursue a full employment policy.…”

The Cyclically Adjusted Budget: History and Exegesis of a Fateful Estimate

“…However, as a large literature testifies, no empirical support can be provided for those claims (see for instance Galbraith, 1997;Palumbo, 2013). Instead, if productive resources and productivity are recognized as affected by the level of activity and by aggregate demand, one can show that restrictive fiscal policy may instead have a perverse effect on public deficit and that, contrarily, expansionary fiscal policy can reduce the ratio of public debt to output (Storm and Naastepad, 2012;Ciccone, 2013;Thirlwall, 2014;Garbellini, 2015).…”