Evening Must-Read: Contractionary Fiscal Policy Is Contractionary

Menzie Chinn: Econbrowser: Euro and Non-Euro Countries and Fiscal Policy:

Contractionary fiscal policy is… contractionary. There has been some dispute over the robustness of the findin… over the proper time horizon…. Here is the entire sample of advanced countries… cumulative growth rates 2009-13 plotted against cumulative change in the cyclically-adjusted budget balances…. The more contractionary the policy stance, the slower the growth…. It’s clear that eurozone countries are a special case, where monetary policy is out of the control of the individual countries; a question is whether countries with their own monetary policy could actually experience an expansionary fiscal contraction…. For the non-euro area group, the regression coefficient is less negative, and is only significant at the 17% marginal significance level…. See this New Palgrave Encyclopedia of Economics chapter for an examination of why one would expect to see relatively large multipliers in the current economic conditions of ZLB and excess capacity.