In recent years Mark Sadowski has done a lot of empirical work on fiscal austerity, some of which has appeared in this blog. Now he has a new study, but first let’s review the two competing theories:
1. Keynesian: Fiscal austerity is contractionary at the zero bound regardless of whether you have an independent central bank.
2. Market monetarist: Fiscal austerity is contractionary if you lack an independent central bank. Fiscal austerity would not be expected to have much effect if you have an independent central bank, due to monetary offset.
Mark sent me a bunch of regressions for both RGDP and NGDP. I’ll focus on the NGDP studies, which are most relevant for tests of demand-side effects. First Mark replicates recent Keynesian studies showing that growth tends to be lower in countries (like Greece) that did a lot of fiscal austerity between 2009 and 2014. So far we have results that are consistent with both models:
Then he looks at the effect of austerity in just the eurozone countries. These economies lack an independent monetary policy.
Again, consistent with both views.
Then he looks at just those economies that do have an independent monetary policy:
Now we see a very different result, fiscal austerity seems to have no effect. This is exactly what the market monetarists predicted, but conflicts with the prediction of the Keynesian model.
I also have a new post over at Econlog, discussing this issue. In that post, I quote Simon Wren-Lewis saying:
In my experience anti-Keynesians tend to shy away from data series, and especially econometrics, and prefer evidence of the ‘they said this, and it didn’t happen’ kind – particularly if ‘they’ happens to be Paul Krugman.
In fact, there are other studies similar to Mark’s. Benn Steil and Dinah Walker did one, and Kevin Erdmann did another. Keynesians simply ignore them.
BTW, everyone should congratulate Mark, who just earned his PhD a few days ago, at the University of Delaware. Here’s a picture:
And here’s Mark’s data set:
I’ll try to get to the comments tonight.