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  • Alan J. Auerbach

Fiscal Policy

There have been many strong recent influences on our perspectives of fiscal policy. These include a largely negative experience with fiscal rules, the growing challenge of fiscal sustainability in economies with aging populations, a declining excitement about the possibility of expansionary fiscal contractions, our experience in dealing with the global financial crisis, and a prolonged period of very low government interest rates.

Our experience, along with contributions to theory and evidence, leave us with many challenges and areas where additional research would be useful. Among them are how to develop a fiscal framework that facilitates the use of fiscal policy for stabilization while at the same time preserving a credible commitment to fiscal sustainability, and how to make attempts at fiscal stabilization more timely and effective, to lessen some of the recent imperative to expand the scope of monetary policy.

These are challenging tasks, and governments must face them in an adverse environment in which increasing inequality within countries pushes toward greater government action through spending and redistribution, and yet while increasing mobility of companies and capital has led to intensified tax competition, particularly with respect to corporate taxation, and downward pressure on tax rates and revenues. Although a discussion would go beyond the scope of this paper, it seems evident that facing these tasks in this environment will require reform of the tax structures on which governments rely, and consideration of the extent to which the path to tax reform and more stable tax systems is through international cooperation or national initiatives.

This is the conclusion of Alan Auerbach's paper 'Fiscal Policy' in the series Revisiting Macroeconomics. My comment is simple: I am very pleased not to be running a Treasury/Finance Department, it is all so complicated. (Posted and comments by Henry Thornton).

Read the full paper here.

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