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What Can Fiscal Policy Do in the Current Recession? A Review of Recent Literature and Policy Options

  • Luiz de Mello



This paper reviews the state of public finances in advanced and emerging-market economies as well as recent literature on fiscal multipliers and its implications for policymaking in the current reces¬sion. Sizeable fiscal support packages in the aftermath of the crisis, coupled with a prolonged slack in most large advanced economies, have pushed government debt to unprecedentedly high levels. Sustained medium-term consolidation is therefore needed at a time when the outlook for the global economy remains fragile. This challenging conjuncture has attracted renewed interest in the quan-tification of fiscal multipliers, which vary considerably depending on policy settings (e.g., interac¬tions among fiscal, monetary and structural policies) and the economic environment (e.g., simulta¬neous adjustment in a country s neighbours and trading partners, the level of government indebtedness, exchange rate regimes). Methodological considerations are also important when esti¬mating the potency of fiscal multipliers. Given that the medium-term consolidation needs of most advanced economies are large, and that the fiscal multipliers are likely to be strong in the current juncture, the paper also discusses options for embedding fiscal adjustment in broader policy pack¬ages that include supply-side measures to minimise the short-term effects of budget retrenchment on activity and foster stronger growth in the longer-term.

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Article provided by IEF in its journal Hacienda Pública Española/Review of Public Economics.

Volume (Year): 204 (2013)
Issue (Month): 1 (March)
Pages: 113-139

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Handle: RePEc:hpe:journl:y:2013:v:204:i:1:p:113-139
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