Evolution of fiscal policy

Fiscal policy during the crisis The analysis of the crisis in the European Economic and Monetary Union EMU is quite straightforward, as the fiscal rules are described in treaties at the European level. Fratzscher, C.

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Although it is hard to identify a specific paradigm in economic literature, one can nevertheless be identified within the institutions in Europe and the US stipulating the importance of rules, low fiscal multipliers and the overall stability of the market economy.

Valles: Understanding the effects of government spending on consumption, in: Journal of the European Economic Association, Vol. The management of the crisis was very different in the US.

Schnabel, N. The standard theory suggests that public debt should be used for tax smoothing. A first option is a reliance on rules.

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Tax revenue is collected by the government and is distributed through providing public services. Box 2 The value of fiscal multipliers Fiscal multipliers measure the short-term impact of discretionary fiscal policy on output.

Expansionary fiscal policy

Dosi et al. The credible implementation of this path is a central issue. They reproduce this with sticky-price and bounded-rational households. Autor, D. It occurs when government deficit spending is lower than usual. One must acknowledge a pervasive difference in national preferences, which can be summarised by the amount of national redistribution. As a direct consequence, the measure of fiscal multipliers has generated a huge empirical literature with various identification strategies. Labour market turmoil The labour market, and working conditions more generally, was disrupted by two major transformations whose consequences have been underestimated. It is generally the case that the demand for routine tasks is falling and the demand for abstract or cognitive tasks is increasing. Fiscal policy during the crisis The analysis of the crisis in the European Economic and Monetary Union EMU is quite straightforward, as the fiscal rules are described in treaties at the European level. Third, and importantly, the management of economic policy prior to the crisis tended to rely on rules to avoid discretion in policymaking. This is only true in the short term. In the second part, I discuss what went wrong with the old paradigm, focussing mainly on the role of fiscal policy in the business cycle. The root of this policy mistake is the underestimation of fiscal multipliers when monetary policy sets interest rates at zero.

The problem was no longer massive unemployment but a persistent tendency to inflation against a backdrop of fairly rapid economic growth punctuated by short periods of shallow recession.

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A New Paradigm for Fiscal Policy?