It is time to stop worrying about austerity – also in the UK

I have a piece in City AM today on the impact of fiscal austerity in the UK:

FIVE years ago, nearly every macroeconomist agreed that central banks determined aggregate demand (total spending in the economy), and that fiscal stimulus was therefore unnecessary to lift depressed economies. Conversely, fiscal austerity was seen as irrelevant at best for overall growth; any impact of austerity on demand can be offset by the right monetary policy – though tax cuts could, of course, boost aggregate supply.

But the age-old discussion about the relation of fiscal policy to growth has resurfaced. Keynesian economists – including Òscar Jordà and Alan M Taylor in a paper just released by the National Bureau of Economic Research – claim that government austerity is to blame for lacklustre UK growth since 2010.

There are technical issues with the paper that make Taylor and Jordà’s precise numbers hard to evaluate. And as the economist David B Smith has noted, the important question of fiscal sustainability is not even addressed. But the more fundamental issue in the whole debate is the idea of “monetary offset”.

Read the rest here.

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3 Comments

  1. Chris Papadopoullos

     /  September 11, 2013

    Empirical falsification of the Fiscal Austerity Theory: http://www.iea.org.uk/sites/default/files/publications/files/upldbook310pdf.pdf

    Reply
  2. Yaq12wsX

     /  September 11, 2013

    > In the UK, the Carney Rule commits the Bank to keep interest rates low until unemployment falls below 7 per cent.

    My question is this. Does Carney actually belive that is the best policy or would he agree that this kind of commiting to low intrest rates is kind of weak.

    Does he actually faver QE, but the ‘commiting to low intrest rates’ is just easier to get threw the institutional situation at the central bank there?

    Reply
  3. nickikt

     /  September 11, 2013

    > In the UK, the Carney Rule commits the Bank to keep interest rates low until unemployment falls below 7 per cent.

    Does Carney actually belive this is a good policy or does he secratly wish for actual QE. Maybe the focus on intrest rates is easier to get threw the institutional contraints.

    Reply

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