Author studies the impact of austerity programs implemented in the Eurozone since 2010. To do so he incorporates strategic sovereign default into a DSGE model where the government follows fi
scal rules, which are estimated from data. Author calibrates the model using data from Spain and estimate the size and impact of
fiscal policy shocks associated with austerity policies. He then uses the model to predict what would have happened to output, consumption, employment, sovereign debt levels and spreads if Spain had continued to follow the pre-2010
fiscal rule instead of switching to the austerity track. He
finds that, contrary to the expectations of policy makers at the time, austerity did not decrease sovereign spreads or debt-to-GDP ratios during 2010-2013.

Furthermore it had a negative impact on employment and GDP.

Nevertheless, the short run pain is related to a long run gain. The model predicts that as a consequence of austerity Spain is more likely to show lower levels of debt and spreads in the future.