Voter Responses to Fiscal Austerity

Fiscal Austerity during Debt Crises∗

This paper constructs a dynamic model of government borrowing and default. The government faces a fiscal constraint in that it cannot raise tax rates. By defaulting on the debt, the government can increase domestic consumption. Two types of default arise in this environment: fiscal defaults and aggregate defaults. Fiscal defaults occur because the government cannot service the debt due to its i...

Liquidity traps and expectation dynamics: Fiscal stimulus or fiscal austerity?

We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. The intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus, or...

Unpleasant Supply - Side Arithmetics of Fiscal Austerity

Fiscal Austerity Measures: Spending Cuts vs. Tax Increases

We formulate an overlapping generations model with skill heterogeneity and productive and non-productive government programs to study the macroeconomic and intergenerational welfare effects caused by risk premium shocks and government debt reductions. We demonstrate that in a small open economy with a high level of debt-to-GDP ratio a small increase in the risk premium leads to substantial outp...

Voter responses to challenger opportunity costs

How do voters evaluate candidates in competitive elections? Gordon et al. [Gordon, S.C., Huber, G.A., Landa, D., 2007. Challenger entry and voter learning. American Political Science Review 101 (May), pp. 303–320.] present a model in which the fact of a serious electoral challenge conveys information about the relative competence of the candidates, over and above that conveyed by observable mea...