Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/277235 
Year of Publication: 
2012
Citation: 
[Journal:] Intervention. European Journal of Economics and Economic Policies [ISSN:] 2195-3376 [Volume:] 09 [Issue:] 1 [Year:] 2012 [Pages:] 91-108
Publisher: 
Metropolis-Verlag, Marburg
Abstract: 
This paper explores the macroeconomics of fiscal austerity. A binding budget deficit cap makes the economy more volatile by turning the government budget into an automatic destabilizer. Public debt helps maintain aggregate demand (AD) in the presence of a lower price level because a lower price level increases the real value of public interest payments and also has a positive wealth effect. That makes public debt significantly different from private debt. If the economy is subject to a binding deficit cap public debt may no longer stabilize output. This is because increased real interest payments may be matched by spending cuts, giving rise to a negative balanced budget multiplier.
Subjects: 
fiscal austerity
budget deficit cap
public debt
lower price level
JEL: 
E12
E60
E62
H62
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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