Policy Instruments from Three Perspectives: Fiscal and Monetary Policy

Joseph E. Stiglitz, José Antonio Ocampo, Shari Spiegel, Ricardo Ffrench-Davis and Deepak Nayyar

in Stability with Growth

Published in print August 2006 | ISBN: 9780199288144
Published online September 2006 | e-ISBN: 9780191603884 | DOI:

Series: Initiative for Policy Dialogue Series

 Policy Instruments from Three Perspectives: Fiscal and Monetary Policy

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This chapter focuses on the use of fiscal and monetary policies (including an analysis of the macroeconomic dimensions of prudential regulations) for a closed economy by contrasting Keynesian, heterodox, and conservative perspectives on the effectiveness of various instruments and their ancillary effects. While conservatives believe that fiscal policy is ineffective due to offsetting actions, standard Keynesians believe that government expenditures have a multiplier effect, and heterodox economists believe there may also be a financial accelerator if firms are cash or credit constrained. Similarly, while conservative economists believe that deficit spending maybe be counterproductive and can lead to crowding out and a loss of investor confidence, heterodox and Keynesians believe that there may be crowding in and that a strong economy builds investor confidence. The disagreements extend to views of monetary policy as well where conservatives believe that monetary policy is largely ineffective, Keynesians believe that monetary policy is an important tool in macroeconomic management, and heterodox economists emphasize that credit, and not the money supply, matters for the level of economic activity. Finally, heterodox economists have also designed ways to use prudential regulations as a tool for macroeconomic policy.

Keywords: fiscal policies; monetary policies; prudential regulations; offsetting actions; multiplier effect; financial accelerator; crowding out; crowding in; fiscal stabilization funds

Chapter.  9129 words. 

Subjects: Economic Development and Growth

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