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The return of fiscal policy

Listed author(s):
  • Philip Arestis
  • Malcolm Sawyer

This paper examines the implications of the experience with the financial crisis of August 2007 for fiscal policy and the use made of it. We briefly sketch the changing attitudes toward fiscal policy and the demise of arbitrary rules for the budget deficits and the reassertion of purposeful fiscal policy, that is fiscal policy for the purpose of helping to create the conditions for high levels of employment. Instead of a focus on debt overall, there should be consideration of the net balance sheet position. It is often argued that running a budget deficit places upward pressure on interest rates. We argue that in the context of the use of "functional finance," the ability of the deficit to in effect fund itself removes any underlying upward pressure on interest rates. We also deal with the issue of balance-of-payments constraints, and argue that under such circumstances the appropriate policy response is not to forgo fiscal policy but rather to tackle the balance-of-payments constraint.

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Article provided by M.E. Sharpe, Inc. in its journal Journal of Post Keynesian Economics.

Volume (Year): 32 (2010)
Issue (Month): 3 (April)
Pages: 327-346

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Handle: RePEc:mes:postke:v:32:y:2010:i:3:p:327-346
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