Fiscal Policy after the Great Recession

Abstract

The Great Recession has severely hit the economies of most of the countries. Given that, fiscal policies have gained back a central role in the debate as a tool to recover from this situation. This paper provides an overview about the main controversial issues related to the fiscal policy. In particular, we analyze the role and the different effects played by discretionary counter-cyclical policies – say, for instance, tax cuts or increased government spending. Disagreement on this topic follows from the fact that it is extremely difficult to isolate the exogenous effect of these policies on GDP. We review several ways in which economists have tried to deal with this problem of estimation. Finally, we discuss why spending-based adjustments are preferable and less likely to be costly than tax-based ones and why large fiscal consolidation accompanied by appropriate policies can be much less costly than what we think.