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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