The Case for Fiscal Policy

Philip Arestis and Malcolm Sawyer ()

General Economics and Teaching from University Library of Munich, Germany

Abstract: This paper reconsiders the case for the use of fiscal policy based on a "functional finance" approach that advocates the use of fiscal policy to secure high levels of demand in the context of private aggregate demand, which would otherwise be too low. This "functional finance" view means that any budget deficit should be seen as a response to the perceived excess of private savings over investment at the desired level of economic activity. The paper outlines the "functional finance" approach and its relationship with fiscal policy. It then considers the three lines of argument that have been advanced against fiscal policy on the grounds of "crowding out." These lines are based on the response of interest rates, the supply-side equilibrium, and Ricardian equivalence. The paper advances the view that the arguments, which have been deployed against fiscal policy to the effect that it does not raise the level of economic activity, do not apply when a "functional finance" view of fiscal policy is adopted. A section on the intertermporal budget constraint considers whether this constraint rules out budget deficits, and concludes that in general it does not.

Keywords: fiscal policy; functional finance; Ricardian Equivalence Theorem; inter-temporal budget constraint (search for similar items in EconPapers)
JEL-codes: E62 H30 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2003-06-05
Note: Type of Document - MS Word; prepared on PC; to print on HP/PostScript; pages: 26 ; figures: included
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Chapter: The Case for Fiscal Policy (2006)
Working Paper: The Case for Fiscal Policy (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpgt:0306005

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