Monday, June 20, 2016

On the Alesina Hypothesis

In my  recent NY Times article, I explored several hypotheses to explain slow growth. One was based on work by Alberto Alesina and Silvia Ardagna suggesting that the standard Keynesian view of tax and spending multipliers is inconsistent with the international evidence. 

Paul Krugman says the Alesina-Ardagna work has been "refuted."  Nothing could be further from the truth.  See this recent paper by Alesina, Favero, and Giovazzi on fiscal consolidations, which reports evidence consistent with the earlier work and is forthcoming in the peer-reviewed Journal of International Economics.  (By the way, this work is also consistent with the Romers' finding of large tax multipliers, much larger than the literature finds for spending multipliers.)

To be sure, these issues continue to be debated. Remember: My piece was presenting hypotheses about what has been happening in the economy, not taking a stand about which one is right. From my perspective, the Alesina work suggests a still plausible hypothesis.