Fiscal and interest rate policies in the "new consensus" framework: a different perspective
From the "new consensus in macroeconomics" (NCM) framework, this paper derives a different set of policy proposals. The NCM has become associated with the use of interest rate policy to target inflation and to reach a zero output gap, and to ignore fiscal policy. This paper argues that interest rate policy is an ineffectual policy instrument. It proposes that interest rates should be set broadly in line with the rate of growth. Fiscal policy can be used to partially address short-run fluctuations in economic activity through a combination of automatic fiscal stabilizers and discretionary policy. The general fiscal stance should be set to be consistent with a high level of economic activity along the lines of "functional finance." The task remains to find a coherent policy for the containment of inflation.
Volume (Year): 31 (2009)
Issue (Month): 4 (July)
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