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|
|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|
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.:
- Caballero, Ricardo J & Pindyck, Robert S, 1996.
"Uncertainty, Investment, and Industry Evolution,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 641-662, August.
- Ricardo J. Caballero & Robert S. Pindyck, 1992. "Uncertainty, Investment, and Industry Evolution," NBER Working Papers 4160, National Bureau of Economic Research, Inc.
- Caballero, Ricardo J. & Pindyck, Robert S., 1992. "Uncertainty, investment, and industry evolution," Working papers 3460-92., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- 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.
- Timothy D. Lane & Marianne Schulze-Gattas & Tsidi M Tsikata & Steven T Phillips & Atish R. Ghosh & A. Javier Hamann, 1999. "IMF-Supported Programs in Indonesia, Korea and Thailand," IMF Occasional Papers 178, International Monetary Fund.
- Bennett T. McCallum, 2001.
"Monetary policy analysis in models without money,"
Federal Reserve Bank of St. Louis, issue Jul, pages 145-164.
- Arestis, Philip & Sawyer, Malcolm, 1998. "Keynesian Economic Policies for the New Millennium," Economic Journal, Royal Economic Society, vol. 108(446), pages 181-195, January.
- C. John McDermott & Eswar S Prasad & Pierre-Richard AgÃ©nor, 1999.
"Macroeconomic Fluctuations in Developing Countries; Some Stylized Facts,"
IMF Working Papers
99/35, International Monetary Fund.
- 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 251-285, May.
- 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.
- F. Giavazzi & M. Pagano, 1990.
"Can Severe Fiscal Contractions Be Expansionary? Tales of two Small Euopean Countries,"
89, Dipartimento Scienze Economiche, Universita' di Bologna.
- Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122 National Bureau of Economic Research, Inc.
- 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.
- 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.
- Blanchard, Olivier J, 1985.
"Debt, Deficits, and Finite Horizons,"
Journal of Political Economy,
University of Chicago Press, vol. 93(2), pages 223-247, April.
- Richard Blundell & Thomas MaCurdy, 1998.
"Labour supply: a review of alternative approaches,"
IFS Working Papers
W98/18, Institute for Fiscal Studies.
- 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 Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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.
- De Long, James Bradford & Summers, Lawrence H, 1986.
"Is Increased Price Flexibility Stabilizing?,"
American Economic Review,
American Economic Association, vol. 76(5), pages 1031-1044, December.
- Robert S. Chirinko, 1992.
"Business Fixed Investment Spending: A Critical survey of Modeling Strategies, Empirical Results, and Policy Implications,"
9213, Harris School of Public Policy Studies, University of Chicago.
- 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.
- 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.
- 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.
- 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.
- Laurence H. Meyer, 2001. "Does money matter?," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-16.
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.