Fiscal Packages During Financial Crises: A Policy Maker Brief
13 Pages Posted: 18 Jul 2012
Date Written: July 4, 2012
Abstract
In the current highly uncertain environment where the traditional macro-policy mix is considered less effective in supporting aggregate demand, two features of the systemic crisis are critically relevant in defining the composition of an appropriate fiscal stimulus. One such is pertinent to the successful resolution of the financial crisis as a precondition for achieving sustained growth, in the sense that the solution to the problems of the financial system should always precede the solution to the macroeconomic imbalances. Another such is pertinent to the issue of policy diversification as a means to boost demand, in the sense that fiscal tools should work in conjunction with monetary instruments in a policy accommodation scheme. With respect to the necessities underpinning governments with less troubled economies and no budgetary rules, optimal or generalised fiscal packages might be effective. With regards to the depressive characteristics of the Greek economy in which the root of the problem is structural in nature and to a lesser extent a bubble symptom, fiscal policy can serve as a bridge and drive the economy towards a higher equilibrium path with more employment. In this direction, adopting a rather moderate fiscal stimulus, including productive spending and well targeted measures, might be economically efficient and politically feasible since both economic targets can be accomplished so that short-term recovery can save the economy from its deadly recession while preserving the medium-term sustainability of public finances.
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