Fiscal Policy in Crisis: Rethinking Austerity

Many macroeconomists and politicans claim that fi scal austerity – getting the budget defi - cit down immediately – would be good for employment and growth. We think that fi scal stimulus is expansionary, and fi scal contraction is contractionary. There is a large and growing body of literature that shows that fi scal expansion can help economy to grow and reduce unemployment in near term; that certain types of fi scal stimulus are very effective and that fi scal contractions tend to lower output and employment in the short run. Fiscal austerity may be desirable for the long-term solvency and health of the economy. But it lowers growth and raises unemployment in the near term. A policy mix between new monetary strategy (nominal GDP targeting) and fi scal stimulus would be especially effective.