What Do We Know about the Effects of Austerity?

The literature on fiscal multipliers is far from having reached an agreed upon conclusion. One result, however, seems very robust: in OECD economies, fiscal consolidations based upon expenditure cuts are much less costly than those performed on the tax side. The purpose of this paper is twofold. First, we review recent evidence which considers multi-year fiscal plans. Analyzing multi-year plans is a better way of studying the effects of fiscal policy because governments typically adopt multi-year budget laws. Second, we illustrate alternative theoretical explanations for our findings and we discuss which ones seem more appropriate in different cases.