What Have We Learned about Fiscal Policy from the Crisis?

Abstract

The financial and macroeconomic crisis that began in 2008 has shattered some of the core beliefs of macroeconomists and macroeconomic policymakers: We thought we had macroeconomic fluctuations well under control, but they are back with a vengeance. We thought that the zero lower bound on nominal interest rates was a minor issue, but it has proven central to the behavior of the macroeconomy. We had not paid much attention to issues of financial regulation and financial disruptions, but they too have turned out to be critical to macroeconomic performance. The idea that policymakers would to tolerate years of exceptionally high unemployment due to a deficiency of aggregate demand has gone from unthinkable five years ago to fact today. I am grateful to Christina Romer for helpful comments. The views expressed are purely my own. 1 • The workhorse new Keynesian dynamic stochastic general equilibrium (DSGE)

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