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I Don't Think This Paper Means What You Think It Means…: "Expansionary" Fiscal Austerity Advocates Department

It is really odd...

Giavazzi and Pegano http://www.nber.org/papers/w3372.pdf are a roadmap as to how--if you had to undertake fiscal austerity--you could do it without inflicting major damage to your economy. The requirements were twofold: (i) depreciate your currency, and (ii) have a cooperative central bank that would keep monetary policy extremely easy.

That was the recipe for Danish growth-with-austerity in the mid-1980. That was the recipe for Irish growth-with-austerity in the late-1990s. That was the recipe for U.S. economic growth in the mid-1990s.

Yet for the past three years Giavazzi and Pagano--and more so Alesina and Ardagna--are now used to justify claims that austerity will be expansionary when and where none of the requirements found to be necessary are present.

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