The Case for Fiscal Policy
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.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Wynne Godley, . "Fiscal Policy To The Rescue," Economics Policy Note Archive 01-1, Levy Economics Institute.
- Philip Arestis & Malcolm Sawyer, 2003.
"Reinventing fiscal policy,"
Journal of Post Keynesian Economics,
M.E. Sharpe, Inc., vol. 26(1), pages 3-25, October.
- Philip Arestis & Malcolm Sawyer, 2002.
"Can Monetary Policy Affect The Real Economy?,"
Economics Working Paper Archive
wp_355, Levy Economics Institute.
- Robert J. Barro, 1988.
"The Ricardian Approach to Budget Deficits,"
NBER Working Papers
2685, National Bureau of Economic Research, Inc.
- Barro, Robert J., 1974.
"Are Government Bonds Net Wealth?,"
3451399, Harvard University Department of Economics.
- 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.
- Marco BUTI & Daniele FRANCO & Hedwig ONGENA, 1997. "Budgeetary Policies during Recessions : Retrospective Application of the Stability and Growth Pactâ€ to the Post-War Period," Discussion Papers (REL - Recherches Economiques de Louvain) 1997041, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- 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.
- Buiter, Willem H., 1998.
"Notes on 'A Code for Fiscal Stability',"
CEPR Discussion Papers
1831, C.E.P.R. Discussion Papers.
- 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.
- Hyman P. Minsky, 1991. "Financial Crises: Systemic or Idiosyncratic," Economics Working Paper Archive wp_51, Levy Economics Institute.
When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_382. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie-Celeste Edwards)
If references are entirely missing, you can add them using this form.