In recent years Mark Sadowski has done a lot of empirical work on fiscal austerity, some of which has appeared in this blog. Now he has a new study, but first let’s review the two competing theories:
1. Keynesian: Fiscal austerity is contractionary at the zero bound regardless of whether you have an independent central bank.
2. Market monetarist: Fiscal austerity is contractionary if you lack an independent central bank. Fiscal austerity would not be expected to have much effect if you have an independent central bank, due to monetary offset.