Essays on the Great Recession and the Austerity

Author:
Hausmann Guil, Guillermo, Economics - Graduate School of Arts and Sciences, University of Virginia
Advisors:
Van Wincoop, Eric, Department of Economics, University of Virginia
Young, Eric, Department of Economics, University of Virginia
Murphy, Daniel, Darden School of Business, University of Virginia
Abstract:

This thesis is devoted to the study of two of the most important macroeconomic events from recent times: the Great Recession of 2008-09, and Austerity in 2010-13. We argue that both phenomena have been primarily demand-driven, with the former taking the form of a synchronized self-fulfilling panic, and recessions in several advanced countries during the latter being driven by the increased desire of households to save due to cuts in welfare state spending.
In Chapter 1, “The Great Recession: Divide between Integrated and Less Integrated Countries” (joint with Eric van Wincoop and Gang Zhang), we confirm previous evidence about the absence of a monotonic relationship between the decline in growth of countries during the Great Recession and their level of trade or financial integration, but document instead a strong discontinuous relationship. Countries whose level of economic integration (trade and finance) was above a certain cutoff saw a much larger drop in growth than less integrated countries, a finding that is robust to a wide variety of controls. We argue that standard models based on transmission of exogenous shocks across countries cannot explain these facts. Instead, we explain the evidence in the context of a multi-country model with business cycle panics that are endogenously coordinated across countries.
In Chapter 2, “A Welfare State-based Fiscal Multiplier”, we argue that current new-Keynesian theory cannot explain empirical evidence of larger-than-normal fiscal multipliers during the 2010-13 period if the combination of countries committing to a sizable reduction of public debt and low output growth expectations led agents to believe that austerity measures were permanent. Instead, we explain the evidence in the context of a new-Keynesian model with incomplete markets and heterogeneous households, where the reduced level of public insurance implied by a permanent cut of welfare spending increases incentives to save for precautionary reasons, thus leading to a Paradox-of-Thrift type of recession. Consistent with this view, we find empirically that the welfare state spending multiplier was significantly larger than the non-welfare and tax multipliers for advanced countries engaging in fiscal adjustments over this time period.

Degree:
PHD (Doctor of Philosophy)
Keywords:
Great Recession, Austerity
Language:
English
Rights:
All rights reserved (no additional license for public reuse)
Issued Date:
2017/12/01