The simple macroeconomics of fiscal austerity: Public debt,deficits and deficit caps

Artikel

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Intervention. European Journal of Economics and Economic Policies ; ISSN: 2195-3376 ; Volume: 09 ; Year: 2012 ; Issue: 1 ; Pages: 91-108

Classification and Topics

• Classification: Wirtschaft ; General Aggregative Models: Keynes; Keynesian; Post-Keynesian ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General ; Fiscal Policy ; National Deficit; Surplus
• Subject: fiscal austerity ; budget deficit cap ; public debt ; lower price level

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Palley, Thomas I.
• Event: Veröffentlichung
• (who): Metropolis-Verlag
• (where): Marburg
• (when): 2012

Further information

• DOI: doi:10.4337/ejeep.2012.01.07
• Handle: http://hdl.handle.net/10419/277235
• Last update: 10.03.2025, 11:44 AM CET