Economic Brief

2013

 

September 2013, No. 13-09

Is Fiscal Austerity Good for the Economy?

Renee Haltom and Thomas A. Lubik

Merchants pay interchange fees to card issuers when they accept credit or debit cards as payment. Many merchants have complained that the fees far exceed issuers' costs for processing such transactions. In response to those complaints, Congress directed the Federal Reserve to impose a cap on debit card interchange fees. The cap lowered interchange fees for most merchants, but it yielded some unintended consequences. An analysis of the payment-card market suggests several factors to consider, in addition to issuer costs, when setting interchange fees to maximize social welfare.

Additional Resources

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Alesina, Alberto, and Silvia Ardagna, "Large Changes in Fiscal Policy: Taxes Versus Spending," National Bureau of Economic Research Working Paper No. 15438, October 2009. (A previous version is available online.)

Alesina, Alberto, Carlo Favero, and Francesco Giavazzi, "The Output Effect of Fiscal Consolidations," Manuscript, May 2013 (updated October 2014).

Devries, Pete, Charles Freedman, Jaime Guajardo, Douglas Laxton, Daniel Leigh, and Andrea Pescatori, "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation," in World Economic Outlook: Recovery, Risk, and Rebalancing, Washington, D.C.: International Monetary Fund, October 2010.

Giavazzi, Francesco, and Marco Pagano, "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," National Bureau of Economic Research Working Paper No. 3372, May 1990. (A previous version is available online.)

Haltom, Renee, and Pierre-Daniel G. Sarte, "Is Stimulative Fiscal Policy More Effective at the Zero Lower Bound?" Federal Reserve Bank of Richmond Economic Brief, August 2011.

Haltom, Renee, and John A. Weinberg, "Unsustainable Fiscal Policy: Implications for Monetary Policy," Federal Reserve Bank of Richmond Economic Brief, July 2012.

Haltom, Renee, and Alexander L. Wolman, "A Citizen's Guide to Unconventional Monetary Policy," Federal Reserve Bank of Richmond Economic Brief, December 2012.

Fiscal Monitor: Fiscal Adjustment in an Uncertain World, Washington, D.C.: International Monetary Fund, April 2013.

Perotti, Roberto, "The Austerity Myth: Gain Without Pain?" Bank for International Settlements Working Paper No. 362, November 2011.

Uhlig, Harald, "Some Fiscal Calculus," American Economic Review, May 2010, vol. 100, no. 2, pp. 30-34. (A previous version is available online.)

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