Planned Fiscal Consolidation and Under-Estimated Multipliers
The Great Financial Crisis caused a deep recession and led to very large public deficits. When financial market tensions erupted, many European countries were forced to reduce their deficits. This ‘austerity’ is often credited with the disappointingly slow recovery during the years after the financial crisis. One reason for such a slow recovery could have been that the impact of a reduction in the fiscal deficits is larger than anticipated during a recession, especially if it is accompanied by financial market tensions. At the height of the financial crisis and in its immediate aftermath, this might not have been properly taken into account.