Paul Krugman continues his campaign against the expansionary fiscal contraction hypothesis here. In making his case, he links to a 2007 paper by UCC’s John Considine and University of Portsmouth’s David Duffy. I don’t think the paper provides the slam-dunk evidence Krugman contends, but it is a very interesting read.
It is ironic that the potential expansionary effects of fiscal contractions have become known as non-Keynesian effects. This paper highlights the fact that Keynes and his contemporaries were aware of such potential perverse effects. It is clear that the important indirect effects of budgetary policy via expectation were known in the 1930s. Moreover, the economists of the time recognised the possibilities before they occurred. This paper supplements the existing research on the Expansionary Fiscal Contraction hypothesis by comparing two periods in economic history, Britain in 1930/1 and Ireland 1986/7, and the accompanying economic thought.