Year: 2024
Type: article
Abstract: The paper develops a business cycle model with policymakers' learning about potential output to analyze the European recession following the Global Financial Crisis. The initial recession led to overpessimism about potential output and cyclically adjusted budget balance (CAB), triggering fiscal austerity. The austerity caused further recession, which reinforced potential output and CAB pessimism, requiring continued austerity. The mutual reinforcement between pessimism and austerity contributed to the prolonged recession. The model replicates new findings regarding revisions to potential output estimates and the relationship between fiscal consolidation and policymakers' beliefs. Without policymakers' overpessimism, Eurozone GDP would have been 4.5% higher in 2012.
DOI: 10.1111/jmcb.13233
Authors: PEI KUANG, KAUSHIK MITRA
Language: English
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,620
OpenAlex ID: W4404793355