Syndicate content

fiscal stimulus

Europe: Fiscal Stimulus versus Structural Reform, or More?

Zia Qureshi's picture

The current policy debate on spurring growth is sometimes couched as a choice between fiscal stimulus and structural reform. In the context of the euro zone, this gives an incomplete picture. Two other issues are important: financial policies to avert a credit crunch; and collective actions to rebuild confidence. Adding these complicates the picture but helps point the way to a fuller policy response and clearer priorities to address the current mutually reinforcing combination of a growing sovereign debt-banking problem on the one hand and risks of a recession on the other.

Underutilization of capacity and Ricardian equivalence

Justin Yifu Lin's picture

In a recent blog post “Ricardian Confusions”, Paul Krugman commented on my paper “Beyond Keynesianism and the New New Normal” delivered at the Council on Foreign Relations on Feb. 28. He points out that the government’s fiscal stimulus generally is temporary and households will not increase savings by the full amount of the stimulus. As a result, the stimulus is expansionary even if Ricardian equivalence holds. His comment triggered a series of discussions (Antonio Fatas and Ilian Mihov, Mark Thoma, Paul Krugman, Nick Rowe, and Brad Delong).  
 
I have no disagreement with Paul about the possibility of an expansionary effect of a temporary fiscal stimulus. But if the effect exists and the stimulus does not increase productivity as in his example, there will also be a contractionary effect after the exit of stimulus and the increase of tax to retire the public debts. At the end the issue of underutilization of capacity, which my paper attempts to address, will still be there.