De-Mythologizing Fiscal Consolidation

In Lost Decades, Jeffry Frieden and Menzie Chinn argue that fiscal consolidation is a necessary prerequisite for long term recovery; however, “fiscal consolidation too soon can derail the recovery, and plunge us further into debt. In contrast, some commentators have asserted that fiscal consolidation can be accomplished painlessly, or even with immediate benefits (e.g., JEC-Republicans, Rep. Paul Ryan/Heritage Foundation). Recent empirical work which carefully identifies the relevant episodes concludes that such instances of expansionary fiscal contraction are rare, and usually conducted near full employment.” Ball, Leigh and Loungani review the effects of fiscal contraction in “Painful Medicine“.

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Posted by at 12:36 AM

Labels: Unemployment

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