Friday, 7 December 2012

Does fiscal stimulus make sense?

That is not quite the same as claiming fiscal stimulus has no effect.

There does not seem to be any awareness in the ‘blogosphere’ about the grotesque absurdity of statements like Angela Merkel’s recent claim that Germany needs fiscal stimulus. You would expect the usual suspects to be all over poor Merkel, mercilessly ridiculing the insanity of arguing for fiscal stimulus at the same time Germany is pressuring the ECB [European Central Bank] to squeeze Eurozone NGDP [nominal gross domestic product] ever more ruthlessly.

If Germany needs more AD [aggregate demand], how can Greece and Spain and Italy and Portugal and Ireland and Cyprus and Slovenia not need more AD!

Could it be that ridicule would lead people to ask some obvious questions about the point of fiscal stimulus, when monetary policy can do the same job without ballooning government deficits? It is obvious than most people still do not see the absurdity of fiscal stimulus.

Another example would be those who call for David Cameron to do fiscal stimulus, when he can simply instruct the Bank of England [BoE] to aim for a higher NGDP target. And if the Prime Minister instructs the BoE to keeping aiming for 2% inflation, he is essentially asking them to sabotage fiscal stimulus. Better monetary policy is a necessary and sufficient condition for more AD.

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