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

See all articles by Giuseppe Fontana

Giuseppe Fontana

Leeds University Business School (LUBS); Leeds University Business School (LUBS) - Division of Economics

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

Fontana, Giuseppe, Whither New Consensus Macroeconomics? The Role of Government and Fiscal Policy in Modern Macroeconomics (May 22, 2009). Levy Economics Institute, Working Paper No. 563, Available at SSRN: https://ssrn.com/abstract=1410615 or http://dx.doi.org/10.2139/ssrn.1410615

Giuseppe Fontana (Contact Author)

Leeds University Business School (LUBS) ( email )

Leeds, LS2 9JT
United Kingdom

Leeds University Business School (LUBS) - Division of Economics ( email )

Leeds LS2 9JT
United Kingdom

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