| Abstract: | Since the financial crisis and the ensuing sluggish recovery, a growing number of voices have called for a more active role for fiscal policy to stimulate the economy. We reject this call and argue that in normal times, monetary policy and automatic stabilisers are sufficient to smooth the business cycle. The effectiveness of active fiscal policy is too uncertain and the requirements for a sensible adjustment are too high. Moreover, determining the state of the business cycle is almost impossible in real time. The benefits of active fiscal policy therefore do not outweigh its costs. Only in exceptional situations should policy makers consider active fiscal policy measures as an option. |
