The Cost of Fiscal Retrenchment Revisited : How Strong is the Evidence?
The impact of government deficits on growth has been, for long, the object of a controversy between the Keynesians, for whom an ex ante reduction of the government deficit has negative impacts on growth (at least in the medium-term), and neo- classical economists, for whom activity is entirely determined by supply, so that government deficits do not have any effect on activity. The Danish experience of 1983 - 1986 and the Irish experience of 1986 - 1989, during which drastic reductions in the government deficits did not involve significant output losses, have led to theoretical models being proposed which build a bridge between these two antagonistic approaches. According to these models, the economy would be rather Keynesian in normal times, but "anti-Keynesian" in a period of budgetary crisis.
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