Fiscal Policy: The Wrench in the New Economic Consensus

The so-called new economic consensus has begun to reassess the role and place of fiscal policy and is calling for its restitution in certain cases. Although a "consensus" may exist on various macroeconomic issues within this literature, fiscal policy is not one of them. The debate is stirred largely by the new fiscal theory of the price level, which not only reintroduces fiscal policy effectiveness but also undermines some core neoclassical notions such as government budget constraints, central bank independence, and the quantity equation relationship. The paper evaluates these new developments in the policy writings and actions of current Federal Reserve chairman Ben Bernanke.