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The Congressional Research Service explained in a June 6 report that the economic effects of fiscal consolidation depend a great deal on the point in the business cycle in which it is carried out.
Positive effects of fiscal incentives on fertility quantum have been found in Germany (Buttern and Lutz 1990), Sweden (Walker 1995), Canada (Milligan 2005), and the U.S. (Whittington 1993).
Now, most of the world is cutting budgets and not every economy can reduce the pain by boosting exports.The importance of monetary policy in the 1930s might suggest that central banks could offset the effects of fiscal cuts.
A comprehensive, independent study issued last year by the Center on Budget and Policy Priorities, a research group devoted to the effects of fiscal policies on low- and moderate-income people, criticized the overly simplistic economic impact analysis used to justify them.
But this debt disaster was in some ways harder to escape than those seen in the developing world: the beleaguered European economies no longer had the safety valve of devaluation to boost net trade and offset the contractionary effects of fiscal austerity.Should the ECB have done more in the boom to avoid today's desperate hangover?
The persistence of high inflation (it has been well above the 2% target for most of the last three years) calls into question the idea that the Bank of England could counter the effects of fiscal tightening by easing monetary policy.
She found, "monetary developments were very important and fiscal policy was of little consequence … Even in 1942, the year that the economy returned to its trend path, the effects of fiscal policy were small".
The IMF issued in October 2010, a "World Economic Outlook," whose entire third chapter was devoted to "Macroeconomic Effects of Fiscal Consolidation".
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Justyna Jupowicz-Kozak
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