Reinventing Fiscal Policy
Recent developments in macroeconomic policy, in terms of both theory and practice, have elevated monetary policy while downgrading fiscal policy. Monetary policy has focused on the setting of interest rates as the key policy instrument, along with the adoption of inflation targets and the use of monetary policy to target inflation. Elsewhere, we have critically examined the significance of this shift, which led us to question the effectiveness of monetary policy. We have also explored the role of fiscal policy and argued that it should be reinstated. This contribution aims to consider further that conclusion. We consider at length fiscal policy within the current "new consensus" theoretical framework. We find the proposition of this thinking, that fiscal policy provides at best a limited role, unconvincing. We examine the possibility of crowding out and the Ricardian Equivalence Theorem. A short review of quantitative estimates of fiscal policy multipliers gives credence to our theoretical conclusions. Our overall conclusion is that, under specified conditions, fiscal policy is a powerful tool for macroeconomic policy.
|Date of creation:||05 Jun 2003|
|Date of revision:|
|Note:||Type of Document - MS Word; prepared on PC; to print on HP/PostScript; pages: 22 ; figures: included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
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.:
- Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000.
"Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts,"
World Bank Economic Review,
World Bank Group, vol. 14(2), pages 251-85, May.
- C. John McDermott & Eswar Prasad & Pierre-Richard AgÃ©nor, 1999. "Macroeconomic Fluctuations in Developing Countries; Some Stylized Facts," IMF Working Papers 99/35, International Monetary Fund.
- Richard Clarida & Jordi Gali & Mark Gertler, 1999.
"The Science of Monetary Policy: A New Keynesian Perspective,"
NBER Working Papers
7147, National Bureau of Economic Research, Inc.
- Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
- Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
- N. Gregory Mankiw & Lawrence H. Summers, 1984.
"Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 15(1), pages 223-248.
- N. Gregory Mankiw & Lawrence H. Summers, 1984. "Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?," NBER Working Papers 1345, National Bureau of Economic Research, Inc.
- Blundell, Richard & Macurdy, Thomas, 1999.
"Labor supply: A review of alternative approaches,"
Handbook of Labor Economics,
in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695
- Francesco Giavazzi & Marco Pagano, 1990.
"Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries,"
in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122
National Bureau of Economic Research, Inc.
- Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries," NBER Working Papers 3372, National Bureau of Economic Research, Inc.
- F. Giavazzi & M. Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of two Small Euopean Countries," Working Papers 89, Dipartimento Scienze Economiche, Universita' di Bologna.
- Giavazzi, Francesco & Pagano, Marco, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," CEPR Discussion Papers 417, C.E.P.R. Discussion Papers.
- Robert S. Chirinko, 1993.
"Business fixed investment spending: a critical survey of modeling strategies, empirical results, and policy implications,"
Research Working Paper
93-01, Federal Reserve Bank of Kansas City.
- Robert S. Chirinko, 1992. "Business Fixed Investment Spending: A Critical survey of Modeling Strategies, Empirical Results, and Policy Implications," Working Papers 9213, Harris School of Public Policy Studies, University of Chicago.
- Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
- Arestis, Philip & Sawyer, Malcolm, 1998. "Keynesian Economic Policies for the New Millennium," Economic Journal, Royal Economic Society, vol. 108(446), pages 181-95, January.
- Caballero, Ricardo J. & Pindyck, Robert S., 1992.
"Uncertainty, investment, and industry evolution,"
3460-92., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Bennett T. McCallum, 2001.
"Monetary Policy Analysis in Models Without Money,"
NBER Working Papers
8174, National Bureau of Economic Research, Inc.
- J. Bradford De Long & Lawrence H. Summers, 1985.
"Is Increased Price Flexibility Stabilizing?,"
NBER Working Papers
1686, National Bureau of Economic Research, Inc.
- Blanchard, Olivier J, 1985.
"Debt, Deficits, and Finite Horizons,"
Journal of Political Economy,
University of Chicago Press, vol. 93(2), pages 223-47, April.
- Steven R. Cunningham & Jon Vilasuso, 1995. "Is Keynesian Demand Management Policy Still Viable?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 17(2), pages 187-210, January.
- 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.
- Timothy D. Lane & Marianne Schulze-Gattas & Tsidi M. Tsikata & Steven Phillips & Atish R. Ghosh & A. Javier Hamann, 1999. "IMF-Supported Programs in Indonesia, Korea and Thailand," IMF Occasional Papers 178, International Monetary Fund.
- James Tobin, 1991.
"Price Flexibility and Output Stability: An Old Keynesian View,"
Cowles Foundation Discussion Papers
994R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1991.
- James Tobin, 1993. "Price Flexibility and Output Stability: An Old Keynesian View," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 45-65, Winter.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpgt:0306004. 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: (EconWPA)
If references are entirely missing, you can add them using this form.