The Limits of Fiscal Policy (eBook)

Anthony J Makin is Professor of Economics at Griffith University, Australia, and has previously served with the International Monetary Fund and Australian departments of Finance, Foreign Affairs and Trade and The Treasury.  He has published widely and is a member of the National Economic Panel of the Economic Society of Australia.

Preface and Acknowledgements 5
Contents 7
List of Figures 11
List of Tables 13
Chapter 1 The Keynesian Revival 14
Abstract 14
1.1 Introduction 14
1.2 The G20 Fiscal Response to the Global Financial Crisis 15
1.3 Non-Keynesian Perspectives 18
1.3.1 Economics or Politics? 19
1.3.2 The Paradox of Spending 20
1.4 Gauging Multipliers 21
1.5 What Lies Ahead 23
References 25
Chapter 2 Macro-foundations for Fiscal Analysis 28
Abstract 28
2.1 Introduction 28
2.2 Macro-accounting Foundations 29
2.2.1 Sources of Funds 31
2.3 Saving, Investment and Budget Deficits 31
2.3.1 Budget Deficits and Government Borrowing 31
2.3.2 Private Investment and Saving 32
2.3.3 A Loanable Funds Framework 33
2.4 Aggregate Demand and the Keynesian Cross 34
2.4.1 Non-Keynesian Perspectives 36
2.5 Output, Absorption and the Trade Balance 38
2.5.1 Expenditure-Output Independence 40
2.6 Conclusion 41
References 42
Chapter 3 Budget Deficits, Public Debt and Crowding Out 43
Abstract 43
3.1 Introduction 43
3.2 Closed Economy Loanable Funds Framework 44
3.2.1 Modelling the Global Financial Crisis 44
3.2.2 Macroeconomic Policy Response 45
3.3 Open Economy Loanable Funds Framework 47
3.4 Government Spending 48
3.4.1 Open Economy: PCM 49
3.4.2 Open Economy: ICM 50
3.5 Income Tax Cuts 51
3.6 Balanced Budget 52
3.7 Expected Depreciation 53
3.8 Conclusion 54
References 56
Chapter 4 Budget Deficits and National Income 57
Abstract 57
4.1 Introduction 57
4.2 Investment, National Output and National Income 58
4.3 Government Spending 60
4.3.1 Closed Economy 60
4.3.2 Open Economy: PCM 60
4.3.3 Open Economy: ICM 62
4.4 Income Tax Cuts 62
4.5 Balanced Budget 63
4.6 Credit Rating Downgrades and Expected Depreciation 64
4.7 Public Investment 65
4.7.1 Closed Economy 65
4.7.2 Open Economy: PCM 65
4.7.3 Open Economy: ICM 66
4.8 Conclusion 68
References 68
Chapter 5 Fiscal Policy, Money and the Exchange Rate 69
Abstract 69
5.1 Introduction 70
5.2 The Basic Model 71
5.2.1 The Real Sector 71
5.2.2 The Monetary Sector 73
5.2.3 Price Level Dynamics 75
5.2.4 Longer Run Adjustment 76
5.3 Monetary Policy Versus Fiscal Policy 77
5.3.1 Monetary Stimulus 77
5.3.2 Fiscal Stimulus 79
5.3.3 Public Investment and Business Tax 80
5.4 Conclusion 81
Appendix: Deriving the Model 82
The AE Schedule 82
The MM Schedule 83
References 83
Chapter 6 Fiscal Policy in a Dependent Economy 84
Abstract 84
6.1 Introduction 84
6.2 The Two-Sector Model 85
6.2.1 Expenditure and Output in the Tradable and Non-tradable Sectors 86
6.2.2 Monetary Relations 88
6.2.3 The External Accounts and Capital Mobility 89
6.3 Government Spending 91
6.3.1 Public Spending on Tradables 91
6.3.2 Public Spending on Non-tradables 93
6.4 Unsustainable Current Account Deficits and Fixed Exchange Rates 94
6.4.1 Unsustainable Current Account Deficits 95
6.4.2 Government Spending Under Fixed Exchange Rates: ICM 95
6.5 Conclusion 95
References 98
Chapter 7 Fiscal Consolidation 99
Abstract 99
7.1 Introduction 99
7.2 Public Debt Sustainability 100
7.3 Reduced Government Spending 102
7.3.1 Closed Economy 102
7.3.2 Open Economy: PCM 102
7.3.3 Open Economy: ICM 103
7.3.4 Aggregate Expenditure-Output Model 103
7.3.5 Dependent Economy Model 105
7.4 Income Tax Rises 107
7.5 Repairing the Fiscal Accounts 107
7.6 Conclusion 109
References 110
Chapter 8 Recasting Fiscal Policy 111
Abstract 111
8.1 Introduction 111
8.2 The Confidence Paradox 113
8.3 Recasting Fiscal Policy 114
8.4 Summing up 115
References 117
Erratum to: Macro-foundations for Fiscal Analysis 118
Erratum to: Chapter 2 in: A. J. Makin, The Limits of Fiscal Policy,< ExternalRef>
Bibliography 119
Index 126