Fiscal policy remains in the stone age

Fiscal policy remains in the stone age

With unemployment remaining saturated in the euro area and core inflation well below target, Simon Wren-Lewis argues that German fiscal policy, specifically, is too tight, calling for stimulus by means of public investment.


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Fiscal policy remains in the stone age.

Or maybe the center ages, but definitely not anything more recent compared to the 1920s. Keynes advocated using fiscal expansion in what he called a liquidity trap in the 1930s. Nowadays we use a different terminology and discuss the necessity for fiscal expansion when nominal interest levels are stuck at the zero lower bound or effective lower bound. (I slightly choose the latter terminology since it is up to central banks to choose at what point reducing nominal interest levels further will be risky or counterproductive.) The logic may be the same today since it was in the 1930s. When monetary policy loses its reliable and effective instrument to control the economy, you must bring in another best reliable and effective instrument: fiscal policy.