Archive for April 5th, 2010

The pains of austerity in Lithuania

April 5, 2010

Here is an excellent piece on auterity drive going in Lithuania. The govt. has cut down expenditure because of the crisis but it has led to a social crisis of sorts.

If leaders of the world’s many indebted countries want to see what austerity looks like, they might want to visit this Baltic nation of 3.3 million. 

Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent — including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent.

And the government didn’t stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent.

The net effect on this country’s finances was a savings equal to 9 percent of gross domestic product, the second-largest fiscal adjustment in a developed economy, after Latvia’s, since the credit crisis began.

But austerity has exacted its own price, in social and personal pain.

Pensioners, their benefits cut, swamped soup kitchens. Unemployment jumped to a high of 14 percent, from single digits — and an already wobbly economy shrank 15 percent last year.

Read the whole piece. It is quite sad. Short term pressures to carry on reforms are too huge.

Interviews of Barro, Ostrom, Hoenig and Draghi

April 5, 2010

I came across some good interviews to read.

Barro again criticises the fiscal policy and says there is no multiplier actually (with values around 0.6 – 0.7). Barro also recommends five must read books/papers  on fiscal policy/great depression.

He says Romer-Bernstein picked the multiplier figure of out of thin air:

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For normal recessions use new keynesian model and for abnormal recessions use Keynesian model

April 5, 2010

Paul De Grauwe of University of Leuven has written a superb article in voxeu.

There is a lot of confusion over use of fiscal policy and nature of fiscal multipliers in this crisis. Some like Barro say fiscal policy is useless and somelike Krugman say it is the only way out. And then you have huge number of papers looking at fiscal multipliers. There is also confusion over which kind of fiscal policies have higher multipliers – taxes or government spending.

In this article de Gruawe provides some understanding. He says estimating multipliers depends on the models we use. The models in turn depend on the kind of recession we have. If we have a normal recession, then new keynesian model can work but in an abnormal recession like this one, we need Keynes model.

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