Fiscal Policy after the Crisis

Abstract

In 2009, close to the full outbreak of the global financial crisis, Olivier Blanchard (2009) published an article giving a favourable appraisal of the state of macroeconomics. He came to this verdict on the basis that, after a long period of fierce theoretical debate, the discipline had converged on a model known as new consensus macroeconomics (NCM). In the models that made up NCM, fiscal policy played no role – or, to be more precise, fiscal policy had to follow a balanced-budget rule, with the task of stabilising an economy over the business cycle entrusted entirely to monetary policy (following a Taylor rule). And in the midst of the global financial crisis, Carmen Reinhart and Kenneth Rogoff (2010) proposed the figure of 90% of GDP as a threshold level for public debt which, if exceeded, would harm economic growth, leaving fiscal austerity as the best way to trigger economic recovery. Only a decade later, the economics profession now appears to have taken a very different view on fiscal policy: in order to cope with the next economic crisis, resulting from the coronavirus pandemic, most economists recommend an active fiscal policy stance and even a huge increase in debt-to-GDP levels. This chapter will shed some light on these developments in economic policymaking and explore the future of fiscal policy.