Rethinking Stabilization Policy: Evolution or Revolution?

Olivier Blanchard and Lawrence H. Summers

No 24179, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The obvious lesson from the Great Financial Crisis is that the financial system matters and financial crises will probably happen again. The second, more general, lesson is that the economy is often not self-stabilizing. These two lessons, together with an environment where neutral interest rates are likely to remain low, have clear implications for the design of stabilization policies. At a minimum, they suggest that policies may need to become more aggressive, both ex-ante and ex-post, with a rebalancing of the roles of monetary, fiscal and financial policies. In particular, while low neutral rates decrease the scope for using monetary policy, they increase the scope for using fiscal policy. Think of such rebalancing as evolution. If however, neutral rates become even lower, or financial regulation turns out to be insufficient to prevent crises, more dramatic measures, including larger fiscal deficits, revised monetary policy targets, or sharper restrictions on the financial system, may be needed. Think of this as revolution. Time will tell.

JEL-codes: E02 E20 E31 E32 E42 E5 E62 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-mac
Note: EFG
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Citations: View citations in EconPapers (28)

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