The Case for an Active Fiscal Policy in the Developed World

Abstract

In this world of zero interest rates, fiscal policy has to contribute to support aggregate demand. A well-designed expansionary fiscal policy can contribute to better economic outcomes in three ways. First, it could boost potential growth by investing in activities that raise productivity. Second, it could help monetary policy become more effective by increasing the supply of government bonds and raising the equilibrium real interest rate. Third, it would help reduce income inequality.