Macroeconomic Equilibriums, Crises and Fiscal Policy

• 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 often are unprepared for a crisis. Deficits and debt levels prior to the crisis are commonly too high, limiting the government’s ability to respond to the crisis. In this paper, we argue that theoretical macroeconomic models focus on stable equilibriums, may partially explain why governments underestimate the risk of economic crises and carry too much debt prior to such events. In the standard equilibrium models, crises are one-off events caused by external factors. These macro-models thus neither predict nor expect a future crisis, which creates a false impression of long-run economic stability. Using forecast data, we demonstrate how the equilibrium perspective dominates macroeconomic thinking and how it contributes to too-high debt ratios prior to a crisis. We end the paper by discussing how to design fiscal policy rules based on a crisis rather than an equilibrium approach.

Ämnesord

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Nationalekonomi (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Economics (hsv//eng)

Nyckelord

crisis

equilibrium

macroeconomic models

fiscal policy

national debt

fiscal frameworks

E17

E37

E62

E63

Publikations- och innehållstyp

ovr (ämneskategori)

vet (ämneskategori)