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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 9: The Case for Fiscal Policy

Philip Arestis and Malcolm Sawyer


9. The case for fiscal policy 1 INTRODUCTION Chapter 8 made the point that fiscal policy can be a powerful instrument of economic policy. This chapter strengthens that point by putting forward the case for fiscal policy. The case for the use of fiscal policy and for governments to operate with an unbalanced budget (whether in surplus or deficit) arises from the simple Keynesian proposition that there is no automatic mechanism which ensures that aggregate demand is sufficient to underpin a high level of economic activity (Kalecki, 1939; Keynes, 1936). The notion that the budget should always be in balance (or even on average in balance) is rejected on the grounds that a balanced budget is generally not compatible with the achievement of high levels of aggregate demand. Further, although interest rates may have some impact on the level of aggregate demand, there are constraints on the extent to which interest rates can be varied (whether for reasons akin to a liquidity trap in operation which prevent the reduction of interest rates below a particular level or for foreign exchange considerations) and there are doubts relating to the potency of interest rates to influence aggregate demand. Many lines of argument have been developed to the effect that budget deficits and fiscal policy are ineffectual and/or have undesired (and undesirable) effects. This chapter starts from a ‘functional finance’ perspective (discussed in the next section). This views the role of fiscal policy in terms of raising the level...

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