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.

1.1Introduction

1.2The G20 Fiscal Response to the GFC

1.3Non-Keynesian Perspectives

1.3.1Economics or Politics?

1.3.2The Paradox of Spending

1.4Gauging Multipliers

1.5What Lies Ahead

Chapter 2  Macro-Foundations for Fiscal Analysis

2.2Macro-accounting Foundations

2.2.1Sources of Funds

2.3Saving, Investment and Budget Deficits

2.3.1Budget Deficits and Government Borrowing

2.3.2Private Investment and Saving

2.3.3A Loanable Funds Framework

2.4Aggregate Demand and the Keynesian Cross

2.4.1Non-Keynesian Perspectives

2.5Output, Absorption and the Trade Balance

2.5.1Expenditure-Output Independence

2.6Conclusion

Chapter 3  Budget Deficits, Public Debt and Crowding Out 

3.1Introduction

3.2Closed Economy Loanable Funds Framework

3.2.1Modelling Global Financial Crises

3.2.2Macroeconomic Policy Response

3.3Open Economy Loanable Funds Framework

3.4Higher Government Spending

3.4.1Open Economy:  PCM

3.4.2Open Economy:  ICM

3.5Income Tax Cuts

3.6Balanced Budget

3.7Expected Depreciation

3.8 Conclusion

Chapter 4  Budget Deficits and National Income

4.1Introduction

4.2Investment, National Output and National Income

4.3Higher Government Spending

4.3.1Closed Economy

4.3.2Open Economy: PCM

4.3.3Open Economy: ICM

4.4Income Tax Cuts

4.5Balanced Budget

4.6Credit Rating Downgrades and Expected Depreciation

4.7Public Investment

4.7.1Open Economy: PCM

4.7.2Open Economy: ICM

4.8Conclusion

Chapter 5  Fiscal Policy, Money and the Exchange Rate

5.1Introduction

5.2  The Basic Model

5.2.1 The Real Sector 

5.2.2 The Monetary Sector 

5.2.3   Price Level Dynamics

5.2.4   Longer Run Adjustment

5.3.  Monetary Policy versus Fiscal Policy 

5.3.1 Monetary Stimulus 

5.3.2 Fiscal Stimulus

5.3.3 Public Investment and Business Tax  

5.4  Conclusion 

Appendix

Chapter 6  Fiscal Policy in a Dependent Economy

6.1Introduction

6.2The Two Sector Model

6.2.1Expenditure and Output in the Tradable and Not-tradable Sectors

6.2.2Monetary Relations

6.2.3The External Accounts and Capital Mobility

6.3Increased Government Spending

6.3.1Higher Spending on Tradables

6.3.2Higher Spending on Non-Tradables

6.4Unsustainable Current Account Deficits and Fixed Exchange Rates

6.4.1Unsustainable Current Account Deficits

6.4.2Government Spending Under Fixed Exchange Rates: ICM

6.5Conclusion

Chapter 7  Fiscal Consolidation

7.1Introduction

7.2Public Debt Sustainability

7.3Reduced Government Spending

7.3.1Closed Economy

7.3.2Open Economy: PCM

7.3.3Open Economy: ICM

7.3.5Dependent Economy

7.3.4   Aggregate Expenditure-Output Model

7.4Income Tax Rises

7.5Repairing the Fiscal Accounts

7.6Conclusion

Chapter 8  Recasting Fiscal Policy

8.1Introduction

8.2The C...