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When is the time for austerity? | VOX, CEPR Policy Portal

All signs are that when the next recession comes the deficit hawks will reappear in full force. But the bust is not the time for austerity: Alan Taylor (2013): When Is the Time for Austerity?: "Recent austerity policies have been guided by ideology rather than research. This column discusses research that reconciles disparate estimates of fiscal multipliers in the literature. It finds that common identification assumptions are problematic. Matching methods based on propensity scores show how contractionary austerity really is, especially in economies operating below potential.... A saturated first-stage probit model to predict treatment probability... the policy propensity score. The second stage outcome regression then corrects for the allocation bias in situations where the outcome also depends on observables, but is in every other respect exactly the same specification used in the linear-projection specifications. The consistency of this estimator is 'doubly robust' (unlike inverse probability weight or regression adjustment alone) and guards against incorrect model specification in either the treatment regression or the outcome regression.... Austerity has a mostly negative effect, all years, in both bins. It has larger and more statistically significant negative effects in the slump. In booms, which one could view as the 'full employment' case, we find smaller (and mostly statistically insignificant) impacts of fiscal consolidation on output...


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