Journal Article

The consequences of fiscal stimulus on public debt: a historical perspective

W. D. McCausland and I. Theodossiou

in Cambridge Journal of Economics

Volume 40, issue 4, pages 1103-1116
Published in print July 2016 | ISSN: 0309-166X
Published online September 2015 | e-ISSN: 1464-3545 | DOI: https://dx.doi.org/10.1093/cje/bev059
The consequences of fiscal stimulus on public debt: a historical perspective

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  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Macroeconomics and Monetary Economics; Growth and Fluctuations

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The current policy agenda of neoclassical macroeconomics, as expressed within conservative political circles in the UK and European Union, is that fiscal contraction is the lever that can bring about recovery from the current economic downturn. Allegedly, the reason is that when business sees that the government balance sheet is improving—and public debt declining—there will be greater confidence in the country’s economic prospects, and this increased confidence will lead to higher investment. This in turn will lead to growth and the road to economic recovery. This study examines the impact of government stance on public debt for 11 OECD countries for which data on the relevant factors are available from 1881 to 2011. Contrary to traditional predictions, it turns out that over this long historical span, fiscal contractions deteriorated rather than improved public debt as a percentage of GDP. This implies that fiscal austerity exacerbates the lack of demand and deteriorates rather than enhances the prospects of economic recovery.

Keywords: Debt; Deficit; Inequality; E62; E24; N10

Journal Article.  6969 words. 

Subjects: Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Macroeconomics and Monetary Economics; Growth and Fluctuations

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