Mark Sadowski has done a lot of empirical work on the impacts of fiscal austerity in the past couple of years. Most of you will probably know I tend to be pro-austerity (although David Romer makes an interesting case for the use of fiscal tools, and I'm open to things like counter-cyclical social security taxe rates, as was proposed by the NZ Labor Party). Of course, there is a debate to be had on whether or not monetary policy becomes ineffectual at the zero-lower bound.

Personally, I don't think so. I think the Wicksellian view of monetary policy is a flawed one. However, I want to look at some data today. The two competing ideas I want to look at today are the Keynesian idea (fiscal austerity is contractionary at the lower bound) and the Monetarist idea (fiscal policy can be offset by monetary policy, even at the lower bound). Sadowski has done some nGDP regressions on the correlation between fiscal austerity and growth, which seem to support Keynesian expectations at prima facie as there is a clear negative correlation:


Then Sadowski isolates the Eurozone countries, which lack an independent central bank and the regression is consistent with both ideas.


Finally, Sadowski does a regression for countries with independent central banks and we have a regression which supports the Monetarist line of thinking:



And Sadowski's findings are, of course, in line with certain case studies such as the Sequester in the US in 2013 wherein growth outpaced predictions assuming no austerity thanks to Fed easing. And I have a couple of graphs here drawn from IMF data which supports Sadowski's findings above:


Takeaway: Euro: less government spending correlated with less growth
Non-Euro: Fiscal multiplier is an observed zero.

Euro p = 0.04 y=0.8315 - 1.3306*x
Non-euro p = 0.8 y= 2.3166 + 0.1914 *x

Disclaimers:

(I) Average Real GDP per Capita is the y-axis. Average changes in Structural budget is the x-axis. What is a structural budget? It's the percent of potential GDP a country is deficit spending (or building up a surplus). I took the average of changes to account for austerity measures [otherwise many countries would seem to be deficit spending, like Greece, when they made large reductions in their budget] Positive changes mean austerity; negative changes mean more deficit spending

(II) Data excludes Estonia, Cyprus, and Sao Paulo as either one or the other lacked data for Real GDP per capita growth or balanced budget spending.

(III) AFAIK all the other countries have indep. Central Banks. However, Hong Kong and Switzerland at that time had pegs; there's a regression later on down that moves them to the other side to see the affect.

(IV) Why 2007-2013? I would like to include as much as the business cycle as feasible, 2007 touches on periods when the boom is ending, and 2013 takes us up to theoretical areas for recovery (regression for 2010-2013 later on down)

(V) This is a reg x y, and not a replacement for any serious studies on fiscal multipliers. For that see this IMF paper:
http://www.imf.org/external/pubs/ft/wp/2011/wp1152.pdf
and Ramey (2011)
http://econweb.ucsd.edu/~vramey/research/JEL_Fiscal_14June2011.pdf

Data Source: http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx (To be exact, I selected "Gross domestic product based on purchasing-power-parity (PPP) per capita GDP" and "General government structural balance Percent of potential GDP")


Same as above but without Greece. p = 0.81; y=0.8819 + 0.1973*x (Euro)

Takeaways: Fiscal multiplier closer to zero, but this is odd. Are the effects of ECB's monetary policy disproportionally bad for Greece? Anything to do with structural account surpluses/deficits? (Export/import ratios)


And here's a graph moving Hong Kong and Switzerland to the non-independent side on account of their monetary pegs at the time, although whether or not we ought to do this is open for debate.

translation for econotards?

Countries with an independent central bank (and thus control over monetary policy) have a fiscal multiplier of roughly zero, meaning austerity or stimulus on the tax/spending side of things can be completely offset.

Quote from: Meta Cognition on June 18, 2015, 03:47:24 PM

Quote from: Mr Psychologist on June 18, 2015, 03:46:05 PM

translation for econotards?

Countries with an independent central bank (and thus control over monetary policy) have a fiscal multiplier of roughly zero, meaning austerity or stimulus on the tax/spending side of things can be completely offset.

And is that like the Federal Reserve or like the Bank of England? <.<

Yes.

Soooo either that's the wrong question or they both are the ICB thing >_>

They are both independent central banks.

Prima facie means 'at face value' so to say 'at prima facie' would be to say 'at at face value', which is redundant.

yay charts!