The Fall and Rise of Keynesian Fiscal Policy

Authors


  • This paper was prepared for the Asian Economic Policy Review Conference, “Fiscal Policy and Sovereign Debt,” Tokyo, March 25, 2012. I am grateful to conference participants for comments on an earlier draft.

Correspondence: Alan J. Auerbach, Department of Economics, University of California, Berkeley, CA 94720-3880, USA. Email: auerbach@econ.berkeley.edu

Abstract

This paper reviews the recent evolution of thinking and evidence regarding the effectiveness of activist fiscal policy, including how policy multipliers might vary with respect to economic conditions. Like many other countries that were hit by the “Great Recession,” the USA responded initially with active fiscal policy measures. But a more positive view of fiscal intervention appears to have developed earlier in the decade, and estimated decision rules confirm that there was an increase in policy activism. While this positive view has been tested by the unclear effects of fiscal policy during the Great Recession, recent evidence does suggest that fiscal policy may be especially effective in recession. Fiscal policy activism has also been tempered by recent concerns about growing government debt, a development which potentially might also undercut the effectiveness of expansionary fiscal policy.

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