Aggregate Fiscal Stabilisation Policy: Panacea or Scapegoat?

Gabor Kiss

Financial and Economic Review, 2020, vol. 19, issue 2, 55-87

Abstract: In many cases, analyses of fiscal stabilisation are characterised by errors and omissions. This study addresses these issues. In addition to the operation of automatic stabilisers and the stabilising effect of the EU budget, we examine whether or not a stabilisation policy based on a significant change in the budget deficit can be sustainable and successful. While the economic growth rate is affected by the impulse from the changes in the deficit, the level of economic performance is affected by the deficit. However, the accumulated debt resulting from the persistent deficit is growing faster than the impact on GDP, and thus the debt ratio could start rising sharply in the foreseeable future. We show that a continuous increase in demand may be self-financing only in the unlikely event that the value of the medium-term fiscal multiplier closely approximated 3, i.e. the impact in real terms of a nominal impulse would permanently triple. A lasting, sizeable general demand increase is therefore not a panacea; however, the literature suggests that its alternatives, i.e. structural reform and targeted measures, are more appropriate and less costly for achieving higher trends of GDP growth. Similar results were obtained also in simulations based on the Hungarian experience of targeted measures.

Keywords: fiscal policy; general demand increase; fiscal multiplier; economic policy coordination (search for similar items in EconPapers)
JEL-codes: E32 E61 E62 H62 H63 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:mnb:finrev:v:19:y:2020:i:2:p:55-87

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