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The Limits to Discretionary Fiscal Stabilization Policy

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  • Wren-Lewis, Simon

Abstract

The use of discretionary fiscal policy as a counter-cyclical tool has declined in popularity over the last 30 years. This paper examines the extent to which this decline is justified in terms of developments in macroeconomic theory over this period. Both a small calibrated model and a larger econometric model suggest that the intertemporal consumer will smooth away most of the impact of temporary tax changes, even when additional discounting and credit constraints are allowed for. However, this analysis suggests a more powerful role for other forms of fiscal policy, such as government objections to the use of discretionary fiscal stabilization policy, and makes a tentative suggestion as to how these might be overcome. Copyright 2000 by Oxford University Press.

Suggested Citation

  • Wren-Lewis, Simon, 2000. "The Limits to Discretionary Fiscal Stabilization Policy," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 16(4), pages 92-105, Winter.
    • Handle: RePEc:oup:oxford:v:16:y:2000:i:4:p:92-105
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    Citations

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    Cited by:

    1. Barry Eichengreen, 2004. "Institutions for Fiscal Stability," CESifo Economic Studies, CESifo Group, vol. 50(1), pages 1-25.
    2. Heipertz, Martin, 2003. "The Stability and Growth Pact - Not the best but better than nothing. Reviewing the debate on fiscal policy in Europe's Monetary Union," MPIfG Working Paper 03/10, Max Planck Institute for the Study of Societies.
    3. Philip Arestis & John McCombie, 2009. "On The Effectiveness Of Fiscal Policy As An Instrument Of Macroeconomic Policy," Economic Affairs, Wiley Blackwell, vol. 29(1), pages 77-79, March.
    4. Kamal, Mona, 2015. "Egypt Relative to the COMESA’s Member States: Do Fiscal Policy Rules Matter?," MPRA Paper 67101, University Library of Munich, Germany.
    5. Marco Buti & Sylvester Eijffinger & Daniele Franco, 2003. "Revisiting the Stability and Growth Pact: grand design or internal adjustment?," European Economy - Economic Papers 2008 - 2015 180, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. Philip Arestis, 2011. "Fiscal Policy Is Still an Effective Instrument of Macroeconomic Policy," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(2), pages 143-156, June.
    7. Perez, Javier J. & Hiebert, Paul, 2004. "Identifying endogenous fiscal policy rules for macroeconomic models," Journal of Policy Modeling, Elsevier, vol. 26(8-9), pages 1073-1089, December.
    8. Pavlina R. Tcherneva, 2013. "Reorienting Fiscal Policy: A Critical Assessment of Fiscal Fine-Tuning," Economics Working Paper Archive wp_772, Levy Economics Institute.
    9. Bertrand Candelon & Joan Muysken & Robert Vermeulen, 2010. "Fiscal policy and monetary integration in Europe: an update," Oxford Economic Papers, Oxford University Press, vol. 62(2), pages 323-349, April.
    10. Bartłomiej Rokicki, 2005. "Reforma Paktu Stabilności i Wzrostu," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 10, pages 3-23.
    11. Seppo Honkapohja & Frank Westermann, 2009. "Fiscal Policy and Macroeconomic Stabilisation in the Euro Area: Possible Reforms of the Stability and Growth Pact and National Decision-Making Processes," Palgrave Macmillan Books, in: Seppo Honkapohja & Frank Westermann (ed.), Designing the European Model, chapter 6, pages 177-228, Palgrave Macmillan.
    12. Lars Jonung & Martin Larch, 2006. "Improving fiscal policy in the EU: the case for independent forecasts [‘Fiscal forecasting: The track record of the IMF, OECD and EC’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 21(47), pages 492-534.
    13. Pavlina R. Tcherneva, 2008. "The Return of Fiscal Policy: Can the New Developments in the New Economic Consensus Be Reconciled with the Post-Keynesian View?," Economics Working Paper Archive wp_539, Levy Economics Institute.
    14. Philip Arestis, 2012. "Fiscal policy: a strong macroeconomic role," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(0), pages 93-108.
    15. Goyal, Ashima, 2002. "Coordinating monetary and fiscal policies: a role for rules?," MPRA Paper 29200, University Library of Munich, Germany.
    16. Fk Siebrits & E Calitz, 2001. "Longer‐Term Perspective On The 2001/02 Budget1," South African Journal of Economics, Economic Society of South Africa, vol. 69(3), pages 550-578, September.
    17. Perez, Javier J. & Hiebert, Paul, 2004. "Identifying endogenous fiscal policy rules for macroeconomic models," Journal of Policy Modeling, Elsevier, vol. 26(8-9), pages 1073-1089, December.
    18. Christopher Allsopp, 2002. "Macroeconomic Policy Rules in Theory and in Practice," Discussion Papers 10, Monetary Policy Committee Unit, Bank of England.
    19. Rosaria Rita Canale, 2010. "Central Bank Reaction To Public Deficit And Sound Public Finance The Case Of The European Monetary Union," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 1(1), pages 4-17.

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