There is now a new consensus on fiscal policy in advanced economies (AEs). But how well will this consensus travel? Is this a case where policymakers in emerging markets (EMs) should take their cues from their AE counterparts? To address this question, the Ashoka Center for Economic Policy (ACEP) hosted an exchange amongst the authors; this Policy Brief is the result.
The new consensus can be summarized in three propositions. First, macro policy measures are needed to increase aggregate demand to match supply, because private sector demand has been chronically weak. Second, fiscal policy needs to be the main macro tool to close the output gap, since monetary policy tools have largely been exhausted. Third, there is room to use fiscal policy in this way, because government debt, even though it is high, appears to be sustainable.
These propositions have been increasingly embraced by economists and policymakers, both in the United States and in Europe. Consequently, they could well become the template for advanced economies as they attempt to restore their COVID-19-damaged economies.
Underlying the consensus is a set of assumptions and arguments, which will obviously apply somewhat differently in emerging markets. The question is whether these differences are material enough to affect the broad policy conclusions.pb21-7 (1)
To read the full policy brief by the Peterson Institute for International Economics, please click here.