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Reinventing Fiscal Policy

  • Philip Arestis

    (The Levy Economics Institute)

  • Malcolm Sawyer

    (Leeds University)

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.

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Paper provided by EconWPA in its series General Economics and Teaching with number 0306004.

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Length: 22 pages
Date of creation: 05 Jun 2003
Date of revision:
Handle: RePEc:wpa:wuwpgt:0306004
Note: Type of Document - MS Word; prepared on PC; to print on HP/PostScript; pages: 22 ; figures: included
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