The Role for Discretionary Fiscal Policy in a Low Interest Rate Environment / Martin Feldstein.

Format:

Book

Author/Creator:

Feldstein, Martin.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9203.

NBER working paper series no. w9203

Language:

English

Subjects (All):

Economic stabilization.

Fiscal policy.

Elementary school teachers--Rating of.

Elementary school teachers.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Cambridge, Mass. : National Bureau of Economic Research, 2002.

Summary:

Although there is now widespread agreement in the economics profession that discretionary counter-cyclical'fiscal policy has not contributed to economic stability and may have actually been destabilizing at particular times in the past, there is one important condition when discretionary fiscal policy can play a constructive role: in a sustained downturn when aggregate demand and interest rates are low and when prices are falling or may soon be falling. This short note begins by summarizing the general case against using fiscal policy for stabilization. It next considers the argument for using a hyperexpansive' monetary policy to reduce the risk that a low rate of inflation will lead to a deflationary situation in which monetary policy becomes ineffective. Such a policy would increase the risk of asset price bubbles and of a misaligned exchange rate. Discretionary fiscal policy provides an alternative way to stimulate the economy when aggregate demand and interest rates are low and when prices are falling or may soon be falling. A stimulus can be achieved without increasing budget deficits if the fiscal policy acts by providing an incentive for increased private spending. Specific examples for the U.S. and Japan are considered.

Notes:

Print version record

September 2002.