Whither New Consensus Macroeconomics? The Role of Government and Fiscal Policy in Modern Macroeconomics
Levy Economics Institute, Working Paper No. 563
24 Pages Posted: 27 May 2009
Date Written: May 22, 2009
Abstract
In the face of the dramatic economic events of recent months and the inability of academics and policymakers to prevent them, the New Consensus Macroeconomics (NCM) model has been the subject of several criticisms. This paper considers one of the main criticisms lodged against the NCM model, namely, the absence of any essential role for the government and fiscal policy. Given the size of the public sector and the increasing role of fiscal policy in modern economies, this simplifying assumption of the NCM model is difficult to defend. This paper maintains that conventional arguments used to support this controversial assumption - including historical reasons, theoretical propositions, and practical issues - do not have solid foundations. There is, in fact, nothing inherently monetary in the stabilization policies found in the model. Thus, fiscal policy could play a role at least as important as monetary policy in the NCM model.
Keywords: Fiscal Policy, New Consensus, Keynesian Economics, Macroeconomic Models
JEL Classification: E12, E62, C30
Suggested Citation: Suggested Citation
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