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Fiscal Policy in a Stock-Flow Consistent (SFC) Model

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Abstract

In our book Monetary Economics (Godley and Lavoie 2007, chapter 11), we claimed that a particular level of government expenditure relative to tax rates, and also relative to gross domestic product (GDP), is essential if stable, noninflationary growth and full employment are to be achieved. We argued, on the basis of simulation models, that monetary policy on its own was unable to maintain full employment and low inflation for more than a short period of time, unless fiscal policy was appropriate. Our conclusions conflict with those of the ‘new consensus,’ which holds that a correct setting of interest rates is the necessary and sufficient condition for achieving noninflationary growth at full employment, leaving fiscal policy rather in the air. This has led different countries to adopt different targets for the nominal budget deficit and government debt as proportions of (nominal) GDP measured ex post.1 But the rationale for such targets has never been clear (at least to us).

Keywords

  • Gross Domestic Product
  • Monetary Policy
  • Central Bank
  • Fiscal Policy
  • Real Interest Rate

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© 2012 Wynne Godley

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Godley, W., Lavoie, M. (2012). Fiscal Policy in a Stock-Flow Consistent (SFC) Model. In: Lavoie, M., Zezza, G. (eds) The Stock-Flow Consistent Approach. Palgrave Macmillan, London. https://doi.org/10.1057/9780230353848_10

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