Stimulus or Austerity: A Comparative Analysis of Fiscal Policy in Response to the Great Recession

Abstract

The Great Recession has provided a natural experiment and data
for which to test Keynesian theory as well reignited the debate of the
effectiveness of stimulus policy during recessions. In response to the
proposition of expansionary stimulus, proponents of austerity have cited
recent studies purporting austerity to also be expansionary. This paper
provides an overview of the theoretical underpinnings and merits of these
policy choices and argues based on current trends in economic indicators
that stimulus was the appropriate action given the specific circumstances
of the Great Recession. A comparative analysis is conducted of trends
in economic indicators for the United States, United Kingdom, and
euro area to evaluate which policy was more effective. Findings of
this research show that initial stimulus measures in the U.K. and euro
area were insufficient and austerity policy prolonged their recession’s
impact. Findings of this research also support the narrative that the larger
and prolonged stimulus of the U.S. brought its economy out of official
recession quicker and shows positive signs of economic health as of the
end of 2014.