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The Case for Fiscal Policy

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Author Info

  • Philip Arestis

    (The Levy Economics Institute)

  • Malcolm Sawyer

    (Leeds University)

Abstract

This paper reconsiders the case for the use of fiscal policy based on a "functional finance" approach that advocates the use of fiscal policy to secure high levels of demand in the context of private aggregate demand, which would otherwise be too low. This "functional finance" view means that any budget deficit should be seen as a response to the perceived excess of private savings over investment at the desired level of economic activity. The paper outlines the "functional finance" approach and its relationship with fiscal policy. It then considers the three lines of argument that have been advanced against fiscal policy on the grounds of "crowding out." These lines are based on the response of interest rates, the supply-side equilibrium, and Ricardian equivalence. The paper advances the view that the arguments, which have been deployed against fiscal policy to the effect that it does not raise the level of economic activity, do not apply when a "functional finance" view of fiscal policy is adopted. A section on the intertermporal budget constraint considers whether this constraint rules out budget deficits, and concludes that in general it does not.

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Bibliographic Info

Paper provided by EconWPA in its series General Economics and Teaching with number 0306005.

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Length: 26 pages
Date of creation: 05 Jun 2003
Date of revision:
Handle: RePEc:wpa:wuwpgt:0306005

Note: Type of Document - MS Word; prepared on PC; to print on HP/PostScript; pages: 26 ; figures: included
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Web page: http://128.118.178.162

Related research

Keywords: fiscal policy; functional finance; Ricardian Equivalence Theorem; inter-temporal budget constraint;

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References

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  1. Philip Arestis & Malcolm Sawyer, 2003. "Reinventing Fiscal Policy," Economics Working Paper Archive wp_381, Levy Economics Institute.
  2. M. Buti & D. Franco & H. Ongena, 1997. "Budgetary Policies during Recessions - Retrospective Application of the "Stability and Growth Pact" to the Post-War Period," European Economy - Economic Papers 121, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  4. Buiter, Willem H, 1998. "Notes on 'A Code for Fiscal Stability'," CEPR Discussion Papers 1831, C.E.P.R. Discussion Papers.
  5. Hyman P. Minsky, 1991. "Financial Crises: Systemic or Idiosyncratic," Economics Working Paper Archive wp_51, Levy Economics Institute.
  6. Gerald P. Dwyer, Jr. & R. W. Hafer, 1998. "The federal government's budget surplus: Cause for celebration?," Economic Review, Federal Reserve Bank of Atlanta, issue Q 3, pages 42-51.
  7. Wynne Godley, . "Fiscal Policy To The Rescue," Economics Policy Note Archive 01-1, Levy Economics Institute.
  8. Philip Arestis & Malcolm Sawyer, 2002. "Can Monetary Policy Affect The Real Economy?," Economics Working Paper Archive wp_355, Levy Economics Institute.
  9. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," NBER Working Papers 2685, National Bureau of Economic Research, Inc.
  10. Wynne Godley, 1999. "Seven Unsustainable Processes: Medium-Term Prospects and Policies for the United States and the World," Economics Strategic Analysis Archive 99-10, Levy Economics Institute.
  11. Chadha, Jagjit S & Dimsdale, Nicholas H, 1999. "A Long View of Real Rates," Oxford Review of Economic Policy, Oxford University Press, vol. 15(2), pages 17-45, Summer.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Bevan or Thatcher: who's relevant?
    by chris dillow in Stumbling and Mumbling on 2008-09-26 11:51:45
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Cited by:
  1. Jean-Marie Monnier & Bruno Tinel, 2006. "Endettement public et redistribution en France de 1980 à 2004," Cahiers de la Maison des Sciences Economiques r06006, Université Panthéon-Sorbonne (Paris 1).
  2. Angel Asensio, 2008. "(Post) Keynesian alternative to inflation targeting," Post-Print halshs-00335560, HAL.

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