The rise of counter-cyclical fiscal policy

September 21, 2013

A new IMF paper illustrates the changed realities of public macro policy. In times of negative shocks at the zero bound for interest rates, fiscal policy is best suited for stabilizing economies. Monetary policy takes on a support role, securing funding conditions and financial stability. As a side effect of this policy mix, sovereign risk has emerged as a major concern in advanced economies. This suggests that in times of recovery it will also be fiscal rather than monetary tightening that dampens economic growth and overheating.

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The unpleasant dynamics of fiscal tightening

March 12, 2013

A new IMF paper argues that the short-term negative feedback of fiscal consolidation on economic growth is particularly strong at present, because of lending constraints, limits to monetary easing, and the global scope of restriction. As a result, fiscal tightening in today’s developed countries may, by itself, initially raise debt ratios over and above their trajectory without fiscal action. While the effect may not be lasting, it can lead to dangerous dynamics if financial markets fixate on debt dynamics and governments engage in multiple rounds of tightening.

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