Fiscal Policy and Quantitative Easing

 

The monetary policy has been preferred to fiscal policy to fight the recession, at least for United States. While Quantitative Easing has been recurrently applied in many episodes, from QE1 to the more recent QE4, there has been less attention paid to the possible uses of fiscal policy.

It is true that, in 2008, the Economic Stimulus Act of 2008 was passed and enacted (and was subsequently followed by American Recovery and Reinvestment Act of 2009).  But, besides these steps, not much effort has been done. As Quantitative Easing has reached its limits and it appears that will not be continued, it is not clear what use of fiscal policy could be made.

Fiscal policy has been certainly tried in other ways, and probably the most known use is that of austerity, see here some opinions about its meaning, as well as its notable failures in the peripheral European economies involved in the European sovereign debt crisis.

A few interesting thoughts are offered by Duncan Weldon in the article “Monetary and Fiscal Stimulus are not the same”. Pointing to the research by Aghion, it is argued that the countercyclical fiscal and monetary policies have different effects: the first helping firms dependent from external finance, while the latter positively affects mostly the firms more dependent on finance or on liquidity.

An article by Richard Wood at EconoMonitor reviews the main fiscal and monetary strategies available as for now. According to the author, the best strategy would to finance the budget deficit through new money. In this strategy, the new money is used by the Treasure to finance its budget deficit and enter money directly into the economy. However, the author should explain better how this approach would be radically different from the current Quantitative Easing episodes.

And of course, we have the opinion by Krugman arguing that the right track for now is not more austerity, but more economic stimulus.

At the same time, the rising national debt puts serious limits to a possible fiscal stimulus. An interesting call to put a stop to the further rise of national debt has been made by Hubbard and Kane who suggested an implementation of constraints on expenditures (to prevent over-expenditures and severe cuts), and amendments focused on fiscal balance.

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