Simon Wren-Lewis: Another Lesson of the GFC Unlearnt: The...

Simon Wren-Lewis: Another Lesson of the GFC Unlearnt: The Consensus Assignment Is Dead: "Martin writes: 'There was broadly shared understanding.... Fiscal and budgetary policy should be set to achieve microeconomic and distributive goals, and the desired share of the state in the economy; while monetary policy should take care of stabilising aggregate demand.'... This is what I call the Consensus Assignment...

...It was certainly the consensus among mainstream macroeconomists before the 1990s. But the experience of Japan���s lost decade where they also had interest rates stuck at the ELB began a process of rethinking. By the time the GFC came around many macroeconomists had realised that there was an Achilles Heel in the Consensus Assignment. Fiscal stabilisation was still required when interest rates hit their ELB. That is why we had fiscal stimulus in 2009. The importance of this cannot be overstated. The policy consensus in 2009 was that fiscal stimulus was required, because monetary policy was not enough. This consensus didn���t evaporate in 2010. What overrode it was mainly politics - what I call deficit deceit. There was also a bit of panic in some quarters caused by the Eurozone crisis. However a majority of academic macroeconomists continued to believe that further fiscal stimulus was required, and that majority got steadily larger as time went on....

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