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Reinventing Fiscal Policy

Philip Arestis

University of Cambridge - Department of Land Economy; Universidad del País Vasco (UPV/EHU)

Malcolm C. Sawyer

Levy Economics Institute; University of Leeds - Leeds University Business School (LUBS)

May 2003

The Levy Economics Institute Working Paper No. 381

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.

Number of Pages in PDF File: 24

Keywords: fiscal policy, crowding out, Ricardian Equivalence Theorem

JEL Classification: E62, H30

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Date posted: July 16, 2003  

Suggested Citation

Arestis, Philip and Sawyer, Malcolm C., Reinventing Fiscal Policy (May 2003). The Levy Economics Institute Working Paper No. 381. Available at SSRN: http://ssrn.com/abstract=414480 or http://dx.doi.org/10.2139/ssrn.414480

Contact Information

Philip Arestis (Contact Author)
University of Cambridge - Department of Land Economy ( email )
19 Silver Street
Cambridge, CB3 9EP
United Kingdom
Universidad del País Vasco (UPV/EHU)
Barrio Sarriena s/n
Leioa, Bizkaia 48940
Malcolm C. Sawyer
Levy Economics Institute
Annandale-on-Hudson, NY 12504-5000
United States
845-758-7700 (Phone)
845-758-1149 (Fax)
University of Leeds - Leeds University Business School (LUBS) ( email )
Leeds LS2 9JT
United Kingdom
+44-113-233-4484 (Phone)
+44-113-233-4465 (Fax)
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References:  51
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