Is fiscal austerity really self‐defeating?

This paper analyzes local and global equilibrium dynamics in an optimizing endogenous growth model under expenditure-based fiscal austerity feedback policies expressed relative to the private capital stock—prescribing spending cuts reaction public debt accumulation. Because present value of primary surpluses turns be a nonlinear function debt, two steady state equilibria are shown emerge, one exhibiting low high growth, growth. Local analysis reveals that low-debt/high-growth is saddle-path stable while high-debt/low-growth unstable—the latter thus indicating possibility self-defeating austerity, characterized by off-equilibrium upward spirals because persistent policy-induced adverse effects on dividends revenues. However, when taken into account, it demonstrated states endogenously connected. In particular, even if locally unstable, there exists unique possibly nonmonotonic saddle connection making economy converge state. The existence guarantees determinacy perfect foresight should node, ruling out multiple explosive paths incompatible with government's intertemporal budget constraint agents' transversality condition. foregoing results robust respect adoption output-based—rather than capital-based—policy as long rule sufficiently reactive changes.