The Limits of Fiscal Policy

1. Front Matter

   Pages i-xiii

   PDF

2. The Keynesian Revival

   • Anthony J. Makin

   Pages 1-14

3. Macro-foundations for Fiscal Analysis

   • Anthony J. Makin

   Pages 15-29

4. Budget Deficits, Public Debt and Crowding Out

   • Anthony J. Makin

   Pages 31-44

5. Budget Deficits and National Income

   • Anthony J. Makin

   Pages 45-56

6. Fiscal Policy, Money and the Exchange Rate

   • Anthony J. Makin

   Pages 57-71

7. Fiscal Policy in a Dependent Economy

   • Anthony J. Makin

   Pages 73-87

8. Fiscal Consolidation

   • Anthony J. Makin

   Pages 89-100

9. Recasting Fiscal Policy

   • Anthony J. Makin

   Pages 101-107

10. Erratum to: Macro-foundations for Fiscal Analysis

    • Anthony J. Makin

    Pages E1-E1

11. Back Matter

    Pages 109-121

    PDF

This book presents alternative macroeconomic perspectives, primarily open economy, on the limitations of discretionary fiscal policy, with a focus on government spending.  Following an overview on the post-crisis Keynesian revival and of the macro-foundations needed for subsequent analysis, different perspectives are expounded that highlight the failings of fiscal activism. These perspectives include extended loanable funds analysis, an expenditure-output related model incorporating money and exchange rates, and a dependent economy framework. The approaches are used to examine investment and net export crowding out effects and their implications for national income, and are then adapted to show the macroeconomic impact of different fiscal consolidation measures, revealing that the nature of fiscal repair is critical. A concluding chapter evaluates the nexus between budgetary policy and confidence, summarises the key failings of fiscal activism, and suggests fiscal policy goals. 


The book will appeal to university lecturers and researchers in macroeconomics and economists working in government and the private sector.

• global financial crisis
• fiscal activism
• economic growth
• monetary policy
• Keynes

“Since the Keynesian Revolution, economists have divided themselves in two almost religious camps: the True Believers who, as a past president of the American Economic Association, stated in the 1960s, thought that Keynes had said the last word on how to deal with recessions, and the Atheists who, especially in the late 1970s and in the 1980s, concluded that Keynes’ teaching were wrong.
After the 2008 financial crises, the True Believers re-emerged and managed to influence the policies of many countries, defining as “stupid” policymakers who did not adopt Keynesian policies. In this lucidly-written and well- argued book, Professor Makin presents many theoretical reasons why policymakers would be advised to listen to the Atheists. This reviewer found most of those reasons highly convincing.” (Vito Tanzi, Former Director of the Fiscal Affairs Department of the IMF)

“Tony Makin's book does a great service to modern economics. Crude Keynesians focus on effects of spending increases or tax cuts.  Makin analyses the offsetting factors that exist in the real world of fiscal policy implementation. Government spending usually creates debt.  Debt, especially large amounts, limits spending as lenders require interest to be paid and its repayment.  Does increased government increase or decrease confidence of households and business?  Another example where standard crude Keynesian analysis breaks down.” (Peter Jonson, former Head of Research, Reserve Bank of Australia)

“The attempted revival of activist fiscal policy as a response to the financial crisis of 2008 was based in part on a failure to fully appreciate the role of monetary policy and the exchange rate. In an economy with an inflation targeting central bank and floating exchange rate, there is no reason to expect fiscal policy to be effective in stabilising aggregate demand.  Makin carefully elucidates the analytical foundations of this view of fiscal policy ineffectiveness in a way that is accessible to policymakers, as well as academics.” (Stephen Kirchner, Program Director, United States Studies Centre, University of Sydney)

• Griffith University, Gold Coast, Australia

  Anthony J. Makin

Anthony J Makin is Professor of Economics at Griffith University, Australia, and has previously served with the International Monetary Fund and Australian departments of Finance, Foreign Affairs and Trade and The Treasury.  He has published widely and is a member of the National Economic Panel of the Economic Society of Australia.

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