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New Directions in Monetary and Fiscal Policy Analysis at the Macroeconomic Level

Grant reference: RES-062-23-1436

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Journal article details

Macroeconomic policy in light of the credit crunch : the return of counter-cyclical fiscal policy?
This paper begins by arguing that the 2007/8 credit crunch does not require a fundamental reevaluation of monetary policy. The crunch occurred because regulation was too lax, and we need to develop new and more effective tools of regulatory control. To focus on current account imbalances or mistakes in setting interest rates as a prime cause of the credit crunch is unconvincing, and has the danger of diverting attention away from the need to increase financial regulation. The current recession does require a re-evaluation of the role fiscal policy can play when interest rates hit a zero bound. An expansionary fiscal policy is required because monetary policy-makers are reluctant to promise higher future inflation, and the impact of quantitative easing is likely to be small. Although rising debt may place a limit on how much conventional fiscal policy can do, not all expansionary fiscal measures require additional borrowing. There are two important lessons for the future. First, although monetary policy should remain the primary tool to stabilize the business cycle, the combination of fiscal implementation lags and uncertainty means that some precautionary fiscal actionmay be appropriate during the early phase of some economic downturns. Second, to play this ‘backstop’ stabilization role effectively, a policy that results in the government debt-to-GDP ratio declining (albeit gradually and erratically) in normal times seems appropriate
http://dx.doi.org/10.1093/oxrep/grp034
10.1093/oxrep/grp034
English

Primary contributor

Author Simon Wren-Lewis

Additional details

26
1
Yes
0266-903X
Oxford University Press
14 May 2010
71-86
Oxford
Post-print
Oxford review of economic policy

Cite this outcome

Harvard

Wren-Lewis, Simon (2010) Macroeconomic policy in light of the credit crunch : the return of counter-cyclical fiscal policy?. Oxford review of economic policy. 26 (1), pp. 71-86 Oxford: Oxford University Press.

Vancouver

Wren-Lewis Simon. Macroeconomic policy in light of the credit crunch : the return of counter-cyclical fiscal policy?. Oxford review of economic policy 2010; 26 (1): 71-86.