The Incompetent Central Bank Case for Fiscal Stimulus

Keynesianism has made a roaring comeback in the aftermath of the Great Recession. No matter what ideological leaning different world leaders had at the time the crisis struck, they all threw their ideologies out of the window and implemented massive fiscal stimulus measures. A big reason Keynesianism was brushed aside in the past couple of decades is that the contractionary part of it more often than not simply does not happen, mainly for political reasons. And as far as the expansionary side of the coin is concerned, opponents of Keynesianism rightly point out that it is unnecessary and even counterproductive in times where our economies are running at something close to full employment. Even without fully rational expectations, the effects expansionary policy can have on the Philips curve are very real. Yet the whole edifice of Keynesian stimulus actually working at least in bad times is built on shaky ground as well – it is made under the assumption that a country’s central bank simply drops the ball when it is needed the most.

Continue reading