CARDIM DE CARVALHO AND THE POST KEYNESIANS ON FISCAL POLICY: THE ECONOMIC CONSEQUENCES OF AUSTERITY

Abstract

ABSTRACT This paper discusses the role of austerity policies in the long-run path of the economy, from a Post Keynesian perspective. Our starting points are the role of aggregate demand to determine output in the short and long run and the importance of fiscal policy as a tool for demand stabilization. As main theoretical elements, the paper uses the concept of corridor of stability, adapted by Cardim de Carvalho (2016), and Keynes’s model of shifting equilibrium, as presented by Kregel (1976). We argue that adverse output shocks, followed by contractionary policies that prolong the recession, have an impact on the propensity to consume, liquidity preference, and the marginal efficiency of capital, and thus define a new growth trend for the economy. Not only the depth but also the length of the recession matters if the system is to absorb shocks and return to its previous growth trend. As a result of long recessions, a new trend may arise and be acknowledged as “normal”, thus defining a new corridor of stability.