Fiscal Policy Should Return to Fundamentals

The longstanding argument that go-go Keynesian fiscal stimulus is the answer to every imaginable economic shock has been exposed as bankrupt. Nevertheless, readjustment of both monetary and fiscal policy needs to take place gradually if we are to avoid an epic recession.

CAMBRIDGE – Recent large interest-rate hikes by the US Federal Reserve and the European Central Bank suggest that monetary policymakers are intent on moving forcefully to bring down inflation. But where are the scores of economic commentators who for years have been arguing that fiscal policy – usually meaning deficit spending – needs to play a much more active role in managing business cycles? If it really makes sense to use both monetary and fiscal policy to counter a routine downturn, why are central banks suddenly on their own in attempting to engineer a soft landing with inflation at a four-decade high?

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