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The Case for Fiscal Policy


  • Philip Arestis

    (The Levy Economics Institute)

  • Malcolm Sawyer

    (Leeds University)


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.

Suggested Citation

  • Philip Arestis & Malcolm Sawyer, 2003. "The Case for Fiscal Policy," General Economics and Teaching 0306005, EconWPA.
  • Handle: RePEc:wpa:wuwpgt:0306005
    Note: Type of Document - MS Word; prepared on PC; to print on HP/PostScript; pages: 26 ; figures: included

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    References listed on IDEAS

    1. Philip Arestis & Malcolm Sawyer, 2003. "Reinventing fiscal policy," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 26(1), pages 3-25.
    2. Philip Arestis & Malcolm Sawyer, 2002. "Can Monetary Policy Affect The Real Economy?," Macroeconomics 0209012, EconWPA.
    3. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
    4. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    5. 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.
    6. Buiter, Willem H, 2001. "Notes on 'A Code for Fiscal Stability.'," Oxford Economic Papers, Oxford University Press, vol. 53(1), pages 1-19, January.
    7. Gerald P. Dwyer & 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.
    8. Wynne Godley, "undated". "Fiscal Policy To The Rescue," Economics Policy Note Archive 01-1, Levy Economics Institute.
    9. Marco BUTI & Daniele FRANCO & Hedwig ONGENA, 1997. "Budgeetary Policies during Recessions : Retrospective Application of the Stability and Growth Pact” to the Post-War Period," Discussion Papers (REL - Recherches Economiques de Louvain) 1997041, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    10. Hyman P. Minsky, 1991. "Financial Crises: Systemic or Idiosyncratic," Economics Working Paper Archive wp_51, Levy Economics Institute.
    11. 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.
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    Blog mentions

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    1. Bevan or Thatcher: who's relevant?
      by chris dillow in Stumbling and Mumbling on 2008-09-26 16:51:45


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    Cited by:

    1. Angel Asensio, 2008. "(Post) Keynesian alternative to inflation targeting," Post-Print halshs-00335560, HAL.
    2. 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.
    3. Jean-Marie Monnier & Bruno Tinel, 2006. "Endettement public et redistribution en France de 1980 à 2004," Cahiers de la Maison des Sciences Economiques r06006, Université Panthéon-Sorbonne (Paris 1).

    More about this item


    fiscal policy; functional finance; Ricardian Equivalence Theorem; inter-temporal budget constraint;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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