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The Efficacy of Fiscal Policy and the Policymaker

Three Viewpoints

The conventional counter-cyclical fiscal policy is to manage aggregate demand using discretionary fiscal measures. Needless to say, fiscal policy is conducted by fiscal authorities. By highlighting the ability of the policymaker, we may evaluate the efficacy of discretionary fiscal measures from the following three viewpoints: (1) timing, (2) effectiveness, and (3) the purpose of the policymaker.

With regard to timing (1), an important issue is the seriousness of the policy lag. This relates to the ability of the policymaker. Theoretically, this point is associated with the issue of “rule versus discretion” in economic policy. The efficacy of fiscal policy (2) is the cause of most concern in academic research. Can Keynesian fiscal measures really control macroeconomic fluctuations? What should be the size of the fiscal multiplier? These questions are key policy issues regarding fiscal management. Conflicting views exist between neoclassical and Keynesian economists (or between new macroeconomics and conventional Keynesian economics). We discuss these points in Chap. 6 after explaining the alternative view of neoclassical macroeconomics in Chap. 3.

The purpose of policymakers (3) is intensively discussed in the political economic literature, in which many academic results have been accumulated. For example, studies investigate how a ruling party’s interests affect fiscal policy during the process of policymaking and enforcement. Even if a policy is beneficial from viewpoints (1) and (2), fiscal policy is not ideal if the purpose of the policymaker is not benevolent but biased. We discuss this political issue in Chap. 12.

 
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