Macroeconomic Equilibriums, Crises and Fiscal Policy
(2020) In Working papers- Abstract
- Macroeconomic crises are common as well as economically, socially and politically costly. Fiscal policy plays an important role in alleviating the costs of the crisis. However, recent experiences suggest that the public finances often are unprepared for a crisis. Deficits and debt levels prior to the crisis are commonly too high, limiting the government’s ability to respond to the crisis. In this paper, we argue that theoretical macroeconomic models focus on stable equilibriums, may partially explain why governments underestimate the risk of economic crises and carry too much debt prior to such events. In the standard equilibrium models, crises are one-off events caused by external factors. These macro-models thus neither predict nor... (More)
- Macroeconomic crises are common as well as economically, socially and politically costly. Fiscal policy plays an important role in alleviating the costs of the crisis. However, recent experiences suggest that the public finances often are unprepared for a crisis. Deficits and debt levels prior to the crisis are commonly too high, limiting the government’s ability to respond to the crisis. In this paper, we argue that theoretical macroeconomic models focus on stable equilibriums, may partially explain why governments underestimate the risk of economic crises and carry too much debt prior to such events. In the standard equilibrium models, crises are one-off events caused by external factors. These macro-models thus neither predict nor expect a future crisis, which creates a false impression of long-run economic stability. Using forecast data, we demonstrate how the equilibrium perspective dominates macroeconomic thinking and how it contributes to too-high debt ratios prior to a crisis. We end the paper by discussing how to design fiscal policy rules based on a crisis rather than an equilibrium approach. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/63a67703-f6d0-41ad-b80e-cbc121a5f043
- author
- Andersson, Fredrik N G LU
- organization
- publishing date
- 2020-10-15
- type
- Working paper/Preprint
- publication status
- published
- subject
- keywords
- crisis, equilibrium, macroeconomic models, fiscal policy, national debt, fiscal frameworks, E17, E37, E62, E63
- in
- Working papers
- issue
- 2020:21
- pages
- 35 pages
- language
- English
- LU publication?
- yes
- id
- 63a67703-f6d0-41ad-b80e-cbc121a5f043
- alternative location
- https://swopec.hhs.se/lunewp/abs/lunewp2020_021.htm
- date added to LUP
- 2020-11-16 10:16:06
- date last changed
- 2020-11-16 10:16:06
@misc{63a67703-f6d0-41ad-b80e-cbc121a5f043,
abstract = {{Macroeconomic crises are common as well as economically, socially and politically costly. Fiscal policy plays an important role in alleviating the costs of the crisis. However, recent experiences suggest that the public finances often are unprepared for a crisis. Deficits and debt levels prior to the crisis are commonly too high, limiting the government’s ability to respond to the crisis. In this paper, we argue that theoretical macroeconomic models focus on stable equilibriums, may partially explain why governments underestimate the risk of economic crises and carry too much debt prior to such events. In the standard equilibrium models, crises are one-off events caused by external factors. These macro-models thus neither predict nor expect a future crisis, which creates a false impression of long-run economic stability. Using forecast data, we demonstrate how the equilibrium perspective dominates macroeconomic thinking and how it contributes to too-high debt ratios prior to a crisis. We end the paper by discussing how to design fiscal policy rules based on a crisis rather than an equilibrium approach.}},
author = {{Andersson, Fredrik N G}},
keywords = {{crisis; equilibrium; macroeconomic models; fiscal policy; national debt; fiscal frameworks; E17; E37; E62; E63}},
language = {{eng}},
month = {{10}},
note = {{Working Paper}},
number = {{2020:21}},
series = {{Working papers}},
title = {{Macroeconomic Equilibriums, Crises and Fiscal Policy}},
url = {{https://swopec.hhs.se/lunewp/abs/lunewp2020_021.htm}},
year = {{2020}},
}