a column by Paul De Grauwe and Yuemei Ji for VOX: CEPR’s Policy Portal
With an economic slowdown looming in the euro area, how should fiscal policies respond?
This column uses a behavioural macroeconomic framework to investigate the trade-offs between stabilising output and public debt. It proposes that, when the interest rate is lower than the growth rate of the economy, fiscal policy can be used as a tool for output stabilisation while keeping public debt stable. It argues that many EU countries have the fiscal space to stimulate their economies, which could help in preventing a recession.
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