Abstract:
This thesis investigates the macroeconomic effects of fiscal policy, with a focus on austerity (or public-sector deleveraging), and private-sector deleveraging. It highlights the pivotal
role of nonlinearities in generating different outcomes depending on the sign of the fiscal
adjustment and how these nonlinearities shape the interaction between public and private
deleveraging. In the following, I provide a short summary of the main findings of each
chapter.
Chapter 1 is based on joint work with Benjamin Born, Gernot Müller, and Johannes
Pfeifer. Under fixed exchange rates, fiscal policy is an effective tool. According to classical
views because it impacts the real exchange rate, according to Keynesian views because it
impacts output. Both views have merit because the effects of government spending are
asymmetric. A spending cut lowers output but does not alter the real exchange rate. A
spending increase appreciates the exchange rate but does not alter output unless there is
economic slack. We establish these results in a small open economy model with downward
nominal wage rigidity and provide empirical evidence on the basis of quarterly time-series
data for 38 countries.
Chapter 2 takes a closer look at the Greek experience during the Great Contraction.
Greece stands out as having the sharpest decline in GDP and government spending in
Europe over the 2010-14 period. The aim of this paper is to assess the macroeconomic
effects of public deleveraging, defined as government spending below forecast, and private
deleveraging. The former mostly accounts for the output loss experienced by the country.
However, the joint occurrence of public and private deleveraging generates quantitatively
relevant nonlinear effects.
Chapter 3 critically reviews the literature assessing the individual and joint effects of
public and private deleveraging. The amplification mechanism set in motion by their joint
occurrence is likely to be quantitatively relevant. However, there is still limited evidence
about the real extent of such interaction.
I hope the findings of this thesis can make policy makers in the euro area aware of the
nontrivial consequences of their fiscal decisions.
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