Macroeconomic equilibriums, crises, and fiscal policy
(2022) In Global Discourse 12(3-4). p.664-688- 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 are often unprepared for a crisis. Deficits and debt levels prior to the crisis are commonly too high, limiting the government’s ability to support the economy through the crisis and the recovery phase. In this article, I argue that theoretical macroeconomic models’ underlying assumption of a stable long-run equilibrium may partially explain why governments fail to prepare the public finances for a future crisis. In the standard equilibrium models, crises are seen as one-off events caused by external factors, which... (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 are often unprepared for a crisis. Deficits and debt levels prior to the crisis are commonly too high, limiting the government’s ability to support the economy through the crisis and the recovery phase. In this article, I argue that theoretical macroeconomic models’ underlying assumption of a stable long-run equilibrium may partially explain why governments fail to prepare the public finances for a future crisis. In the standard equilibrium models, crises are seen as one-off events caused by external factors, which creates a false impression of long-run economic stability. The models thus indirectly indicate that there is no need to prepare for a potential crisis. Using forecast data, I demonstrate how the equilibrium perspective dominates macroeconomic thinking and how it contributes to toohigh debt ratios prior to a crisis. I end the article by discussing how to design fiscal policy rules based on a crisis rather than an equilibrium perspective. (Less)
- Abstract (Swedish)
- 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 support the economy through the crisis and the recovery phase. In this paper, I argue that theoretical macroeconomic models’ underlying assumption of a stable long-run equilibrium may partially explain why governments fail to prepare the public finance for a future crisis. In the standard equilibrium models, crises are seen as one-off events caused by external factors, which creates a false impression of long-run economic stability. The models thus indirectly... (More)
- 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 support the economy through the crisis and the recovery phase. In this paper, I argue that theoretical macroeconomic models’ underlying assumption of a stable long-run equilibrium may partially explain why governments fail to prepare the public finance for a future crisis. In the standard equilibrium models, crises are seen as one-off events caused by external factors, which creates a false impression of long-run economic stability. The models thus indirectly indicate that there is no need to prepare for a potential crisis. Using forecast data, I demonstrate how the equilibrium perspective dominates macroeconomic thinking and how it contributes to too-high debt ratios prior to a crisis. I end the paper by discussing how to design fiscal policy rules based on a crisis rather than an equilibrium perspective. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/e585db34-e960-4a99-adf7-10cf490f0005
- author
- Andersson, Fredrik N G LU
- organization
- publishing date
- 2022-03-28
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- economic crisis, fiscal policy, economic models, equilibrium models, national debt, sovereign debt crisis, fiscal frameworks
- in
- Global Discourse
- volume
- 12
- issue
- 3-4
- pages
- 25 pages
- publisher
- Bristol University Press
- external identifiers
-
- scopus:85138217349
- ISSN
- 2043-7897
- DOI
- 10.1332/204378921X16330096286109
- language
- English
- LU publication?
- yes
- id
- e585db34-e960-4a99-adf7-10cf490f0005
- date added to LUP
- 2021-10-06 07:23:30
- date last changed
- 2023-03-05 19:02:30
@article{e585db34-e960-4a99-adf7-10cf490f0005,
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 are often unprepared for a crisis. Deficits and debt levels prior to the crisis are commonly too high, limiting the government’s ability to support the economy through the crisis and the recovery phase. In this article, I argue that theoretical macroeconomic models’ underlying assumption of a stable long-run equilibrium may partially explain why governments fail to prepare the public finances for a future crisis. In the standard equilibrium models, crises are seen as one-off events caused by external factors, which creates a false impression of long-run economic stability. The models thus indirectly indicate that there is no need to prepare for a potential crisis. Using forecast data, I demonstrate how the equilibrium perspective dominates macroeconomic thinking and how it contributes to toohigh debt ratios prior to a crisis. I end the article by discussing how to design fiscal policy rules based on a crisis rather than an equilibrium perspective.}},
author = {{Andersson, Fredrik N G}},
issn = {{2043-7897}},
keywords = {{economic crisis; fiscal policy; economic models; equilibrium models; national debt; sovereign debt crisis; fiscal frameworks}},
language = {{eng}},
month = {{03}},
number = {{3-4}},
pages = {{664--688}},
publisher = {{Bristol University Press}},
series = {{Global Discourse}},
title = {{Macroeconomic equilibriums, crises, and fiscal policy}},
url = {{http://dx.doi.org/10.1332/204378921X16330096286109}},
doi = {{10.1332/204378921X16330096286109}},
volume = {{12}},
year = {{2022}},
}