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Re-examining Monetary and Fiscal Policy for the 21st Century

Philip Arestis and Malcolm Sawyer

This book provides a much-needed re-examination of monetary and fiscal policies, their application in the real world and their potential for macroeconomic policy in the 21st century. It provides a detailed discussion and critique of the ‘new consensus' in macroeconomics along with the monetary and fiscal policies encapsulated within it.
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Chapter 8: Reinventing Fiscal Policy

Philip Arestis and Malcolm Sawyer


8. Reinventing fiscal policy 1 INTRODUCTION There has been a major shift within macroeconomic policy over the past two decades or so in terms of the relative importance given to monetary policy and to fiscal policy, with the former gaining considerably in importance, and the latter being so much downgraded that it is rarely mentioned. 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 focus on inflation. The central bank sets its discount rate with a view to achieving the set inflation target, but the discount rate can be considered as set relative to an ‘equilibrium rate’ so that the problem of aggregate demand deficiency appears to be effectively dispensed with.1 This can be seen in the operation of the Taylor rule for the setting of the discount rate (Taylor, 1993). We critically examined the significance of this shift in terms of monetary policy in Chapters 2, 4 and 7. We also looked at the role of fiscal policy there, and argued that, within the ‘new consensus’, there is barely mention of fiscal policy, with the implication, presumably, that fiscal policy does not matter. This chapter aims to consider further fiscal policy (see also Arestis and Sawyer, 1998, 2003e). It begins by examining fiscal policy within the ‘new consensus’ macroeconomics. It then proceeds to consider whether crowding out is not inevitable, along with institutional and...

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