Austerity and Exports

Recent papers have focused attention on the potential for expansionary austerity (i.e. that cutting budget deficits may increase growth in the short run). In this paper we investigate the impact of fiscal consolidation on trade using bilateral trade data. The use of bilateral trade data allows us to demonstrate three novel empirical results. First, while fiscal consolidation is associated with an increase in own‐country exports, it is also correlated to an equal extent with a decrease in foreign‐country exports (i.e. imports); indeed, simultaneous austerity has no statistically significant impact on bilateral trade. Second, the positive effect of austerity on exports disappears when trading partners share a common currency. Third, the increase in exports as a result of austerity is associated entirely with an increase in the range of goods exported (the extensive margin), at the expense of trade volume among existing trade relationships (the intensive margin).