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To what extent did austerity help the Baltic States recover from the economic financial crises in 2008? A comparative study of the Baltic States between 2007 and 2012.

Vaikla, Maarja LU (2013) NEKH01 20131
Department of Economics
Abstract
In the light of the 2008 financial crises, Estonia, Latvia and Lithuania experienced the greatest output declines in the world. In 2012 however the output gap has almost been reduced, competitiveness is regained and the budget balance deficit is kept within the requirements of the EU Maastricht criteria. These achievements were reached by conducting the controversial fiscal stance of austerity, implying contractionary policies by decreasing government expenditure. This adjustment policy goes against traditional Keynesian macroeconomic theory which, given the assumptions of Mundell-Fleming, suggest that in times of recession the economy should be stimulated by expansionary policies. Therefore this study analyzed the cyclically adjusted... (More)
In the light of the 2008 financial crises, Estonia, Latvia and Lithuania experienced the greatest output declines in the world. In 2012 however the output gap has almost been reduced, competitiveness is regained and the budget balance deficit is kept within the requirements of the EU Maastricht criteria. These achievements were reached by conducting the controversial fiscal stance of austerity, implying contractionary policies by decreasing government expenditure. This adjustment policy goes against traditional Keynesian macroeconomic theory which, given the assumptions of Mundell-Fleming, suggest that in times of recession the economy should be stimulated by expansionary policies. Therefore this study analyzed the cyclically adjusted budget balance in order to conclude that the austerity measures were conducted to a great extent. The correlation between the fiscal policies and improvements in the output gap showed that the contractionary policies had an expansionary effect on the economy.
However the effects of the fiscal policies were also influenced by the pre-crises economic conditions which had a great impact on how vulnerable the Baltic economies were when the financial shock occurred. This shows that the austerity policies were not the solely reason for the economic recovery in the Baltic States. Therefore the extent of economic recovery should also be seen in relation to the output levels before the crises, where Estonia reached its pre-crises real growth rate in 2011. (Less)
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author
Vaikla, Maarja LU
supervisor
organization
course
NEKH01 20131
year
type
M2 - Bachelor Degree
subject
keywords
financial crises, austerity, cyclically adjusted budget balance, expansionary effect of contractionary policies, output gap, Baltic States
language
English
id
3812931
date added to LUP
2013-06-20 10:40:54
date last changed
2013-06-20 10:40:54
@misc{3812931,
  abstract     = {In the light of the 2008 financial crises, Estonia, Latvia and Lithuania experienced the greatest output declines in the world. In 2012 however the output gap has almost been reduced, competitiveness is regained and the budget balance deficit is kept within the requirements of the EU Maastricht criteria. These achievements were reached by conducting the controversial fiscal stance of austerity, implying contractionary policies by decreasing government expenditure. This adjustment policy goes against traditional Keynesian macroeconomic theory which, given the assumptions of Mundell-Fleming, suggest that in times of recession the economy should be stimulated by expansionary policies. Therefore this study analyzed the cyclically adjusted budget balance in order to conclude that the austerity measures were conducted to a great extent. The correlation between the fiscal policies and improvements in the output gap showed that the contractionary policies had an expansionary effect on the economy. 
However the effects of the fiscal policies were also influenced by the pre-crises economic conditions which had a great impact on how vulnerable the Baltic economies were when the financial shock occurred. This shows that the austerity policies were not the solely reason for the economic recovery in the Baltic States. Therefore the extent of economic recovery should also be seen in relation to the output levels before the crises, where Estonia reached its pre-crises real growth rate in 2011.},
  author       = {Vaikla, Maarja},
  keyword      = {financial crises,austerity,cyclically adjusted budget balance,expansionary effect of contractionary policies,output gap,Baltic States},
  language     = {eng},
  note         = {Student Paper},
  title        = {To what extent did austerity help the Baltic States recover from the economic financial crises in 2008? A comparative study of the Baltic States between 2007 and 2012.},
  year         = {2013},
}