Is Fiscal Policy Poised for a Comeback?
Posted: 29 Feb 2008
Date Written: 2005
For several decades, discretionary fiscal policy has been in disrepute. Most economists viewed it as unnecessary, because monetary policy was up to the job of stabilizing the economy. Economists also viewed fiscal policy as too clumsy to deal with the relatively short recessions that became the post-war norm. But the experience of Japan and the near-Japan experience of the United States in 2001-3 have renewed some of the old case for fiscal policy. Low-interest environments in which monetary policy becomes ineffective turn out to be a real danger, not a myth. Economic slumps that last for a number of years, offering ample time to implement fiscal expansion, also turn out to be possible. As a result, the case for fiscal policy made by the first generation of Keynesians has experienced a real revival.
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