Fiscal Policy in the Macroeconomic Policy Mix: A Critique of the New Consensus Model and a Comparison of Macroeconomic Policies in France, Germany, the UK and Sweden from a Post-Keynesian Perspective

Abstract

The New Consensus approach in macroeconomics is criticised for its exclusive but unwarranted reliance on stabilising monetary policies, for its ill-designed approach to the role of wages and wage policies, and for its complete neglect of fiscal policies. From a Post-Keynesian perspective, it is argued that fiscal policies play an important role for macroeconomic development, albeit the whole macroeconomic policy-mix of monetary, fiscal and wage policies as well as open economy conditions should be considered. Based on this view macroeconomic performance and macroeconomic policies in France, Germany, Sweden and the UK between 1996 and 2005 are analysed, with a special focus on the role of fiscal policies. It is shown that the fiscal policy stance is important for the explanation of different developments in these economies. However, fiscal policies are not the whole story, monetary policies, wage policies and open economy conditions matter as well.

EMU macroeconomic policy regime

“…178 Nevertheless, if full employment has already been attained, there is no sensible need to run expansive fiscal policy to reach full employment. Hein and Truger (2008) also note that the 'crowding-out' effect may materialise only as a result of the deliberate response of the ECB to rise its policy rate in the face of a fiscal stimulus. Hence, the argument against the macro stabilisation function of fiscal policy is practically trapped in the very ideas on and operational procedures of 'best practice' monetary policy in an inflation targeting regime.…”