ABSTRACT
This chapter focuses on four key studies concluding that spending-biased austerity is preferable and has a good chance of success. So far, Giavazzi and Pagano have not produced credible evidence for spending-biased austerity. This is important enough but there is one angle to Giavazzi and Pagano that could shed some light on whether or not austerity is a useful fiscal-policy strategy. An early study using the anti-Keynesian hypothesis was published by Giavazzi and Pagano for the National Bureau of Economic Research (NBER). A problem with pro-austerity studies is that they are not entirely consistent in defining the success of austerity measures. The chapter also discusses the Swedish case. The purpose is to analyze, with a life-size example, whether there is any merit to the suggestion that spending-cuts-only austerity is more successful than tax-biased austerity. The Swedish austerity experience was preceded by a large exchange-rate depreciation which, in turn, had substantially positive effects on economic activity.
