Macroeconomic equilibriums, crises, and fiscal policy

Summary, in English

Macroeconomic crises are common as well as economically, socially and politically costly. Fiscal policy plays an important role in alleviating the costs of the crisis. However, recent experiences suggest that the public finances are often unprepared for a crisis. Deficits and debt levels prior to the crisis are commonly too high, limiting the government’s ability to support the economy through the crisis and the recovery phase. In this article, I argue that theoretical macroeconomic models’ underlying assumption of a stable long-run equilibrium may partially explain why governments fail to prepare the public finances for a future crisis. In the standard equilibrium models, crises are seen as one-off events caused by external factors, which creates a false impression of long-run economic stability. The models thus indirectly indicate that there is no need to prepare for a potential crisis. Using forecast data, I demonstrate how the equilibrium perspective dominates macroeconomic thinking and how it contributes to toohigh debt ratios prior to a crisis. I end the article by discussing how to design fiscal policy rules based on a crisis rather than an equilibrium perspective.

• Author: Fredrik N G Andersson
• Department/s: Department of Economics
• Publishing year: 2022-03-28
• Language: English
• Pages: 664-688
• Publication/Series: Global Discourse
• Volume: 12
• Issue: 3-4
• Links: http://dx.doi.org/10.1332/204378921X16330096286109
• Document type: Journal article
• Publisher: Bristol University Press
• Topic: Economics
• Keywords: economic crisis; fiscal policy; economic models; equilibrium models; national debt; sovereign debt crisis; fiscal frameworks
• Status: Published
• ISBN/ISSN/Other: ISSN: 2043-7897