The Return of Fiscal Policy: Can the New Developments in the New Economic Consensus Be Reconciled with the Post-Keynesian View?

Levy Economics Institute, Working Papers Series

48 Pages Posted: 16 Jul 2008

See all articles by Pavlina R. Tcherneva

Pavlina R. Tcherneva

Bard College - The Levy Economics Institute

Date Written: July 14, 2008

Abstract

The monetarist counterrevolution and the stagflation period of the 1970s were among the theoretical and practical developments that led to the rejection of fiscal policy as a useful tool for macroeconomic stabilization and full employment determination. Recent mainstream contributions, however, have begun to reassess fiscal policy and have called for its restitution in certain cases. The goal of this paper is to delimit the role of and place for fiscal policy in the New Economic Consensus (NEC) and to compare it to that of Post-Keynesian theory, the latter arguably the most faithful approach to the original Keynesian message. The paper proposes that, while a consensus may exist on many macroeconomic issues within the mainstream, fiscal policy is not one of them. The designation of fiscal policy within the NEC is explored and contrasted with the Post-Keynesian calls for fiscal policy via Abba Lerner's functional finance approach. The paper distinguishes between two approaches to functional finance - one that aims to boost aggregate demand and close the GDP gap, and one that secures full employment via direct job creation. It is argued that the mainstream has severed the Keynesian link between fiscal policy and full employment - a link that the Post-Keynesian approach promises to restore.

Keywords: Fiscal Policy, New Economic Consensus, Fiscal Theory of the Price Level, Functional Finance, Full Employment

JEL Classification: E62, E12, E24, E31

Suggested Citation

Tcherneva, Pavlina R., The Return of Fiscal Policy: Can the New Developments in the New Economic Consensus Be Reconciled with the Post-Keynesian View? (July 14, 2008). Levy Economics Institute, Working Papers Series. Available at SSRN: https://ssrn.com/abstract=1159895 or http://dx.doi.org/10.2139/ssrn.1159895

Pavlina R. Tcherneva (Contact Author)

Bard College - The Levy Economics Institute ( email )

30 Campus Road
Annandale-on-Hudson, NY 12504-5000
United States

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