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Austerity Programs under Liquidity Constraints: Stylized Facts of Recession in the Euro Area

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Christodoulakis, N. Austerity Programs under Liquidity Constraints: Stylized Facts of Recession in the Euro Area. Credit and Capital Markets – Kredit und Kapital, 47(2), 265-296. https://doi.org/10.3790/ccm.47.2.265
Christodoulakis, Nicos "Austerity Programs under Liquidity Constraints: Stylized Facts of Recession in the Euro Area" Credit and Capital Markets – Kredit und Kapital 47.2, 2014, 265-296. https://doi.org/10.3790/ccm.47.2.265
Christodoulakis, Nicos (2014): Austerity Programs under Liquidity Constraints: Stylized Facts of Recession in the Euro Area, in: Credit and Capital Markets – Kredit und Kapital, vol. 47, iss. 2, 265-296, [online] https://doi.org/10.3790/ccm.47.2.265

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Austerity Programs under Liquidity Constraints: Stylized Facts of Recession in the Euro Area

Christodoulakis, Nicos

Credit and Capital Markets – Kredit und Kapital, Vol. 47 (2014), Iss. 2 : pp. 265–296

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Nicos Christodoulakis, Athens University of Economics & Business (AUEB), and Hellenic Observatory LSE. 76, Patission street, Athens 10434

Abstract

Employing a stochastic Brownian pattern for labor income under liquidity constraints, the paper derives closed-form solutions for households" consumption and shows how both the multiplier and the variability of consumption increased after the global crisis and were further enhanced by the austerity programs. The properties of the theoretical model are found to be in line with a number of stylized facts observed in the Southern Euro Area countries, where recession is ravaging for three years after the implementation of austerity programs. A critical factor of such a prolonged recession was that austerity programs were at the same time too harsh and intensive, grossly underestimating the adverse effects on economic activity. The paper argues that the same fiscal adjustment could have been achieved more gradually and with milder effects on households" demand.