Reinventing Fiscal Policy

The Levy Economics Institute Working Paper No. 381

24 Pages Posted: 16 Jul 2003

See all articles by Philip Arestis

Philip Arestis

University of Cambridge - Department of Land Economy; University of the Basque Country

Malcolm C. Sawyer

University of Leeds

Date Written: May 2003

Abstract

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.

Keywords: fiscal policy, crowding out, Ricardian Equivalence Theorem

JEL Classification: E62, H30

Suggested Citation

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

Philip Arestis (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

University of the Basque Country

Barrio Sarriena s/n
Leioa, Bizkaia 48940
Spain

Malcolm C. Sawyer

University of Leeds ( email )

Leeds LS2 9JT
United Kingdom

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