Fiscal Policy Is Still an Effective Instrument of Macroeconomic Policy

Recent developments in macroeconomics and macroeconomic policy, what has come to be known as “New Consensus in Macroeconomics”, downgrades the role of fiscal policy and upgrades that of monetary policy. This contribution aims to consider this particular contention by focusing on fiscal policy. We consider fiscal policy within the current “new consensus” theoretical framework, which views fiscal policy as ineffective, and argue that it deserves a great deal more attention paid to it than it has been recently. We review and appraise recent and not so recent theoretical and empirical developments on the fiscal policy front. The possibility of fiscal and monetary policy coordination is proposed and discussed to conclude that it deserves a great deal more attention and careful consideration than it has been given to in the past. Our overall conclusion is that discretionary application of fiscal and monetary policy in a coordinated and focused manner as a tool of macroeconomic policy deserves serious attention paid to it than hitherto.Capitalism, Crisis, Institutional transformation

"New Consensus Macroeconomics: A Critical Appraisal"

This paper is concerned with the New Consensus Macroeconomics (NCM) in the case of an open economy. It outlines and explains briefly the main elements of and way of thinking about the macroeconomy from the standpoint of both its theoretical and its policy dimensions. There are a few problems with this particular theoretical framework. We focus here on two important aspects closely related to NCM: the absence of banks and monetary aggregates from this theoretical framework, and the way the notion of the “equilibrium real rate of interest” is utilized by the same framework. The analysis is critical of NCM from a Keynesian perspective.

"Financial Sector Reforms in Developing Countries with Special Reference to Egypt"

Financial reforms, and financial liberalization in particular, have been at the root of many recent cases of financial and banking crises. In several countries financial reforms allowed real interest rates to reach levels exceeding 20 percent per annum in some cases; in other cases, banking and financial crises led to currency crises. National governments either abandoned attempts at implementing financial liberalization (some countries even reimposed controls) or were forced to intervene by nationalizing banks and guaranteeing deposits. This paper draws on this experience to show that the main cause of these crises is the application of a theoretical framework that is predicated on a number of assumptions that are problematic and based on weak empirical foundations. Consequently, it should be no surprise that the reforms were often unsuccessful and in many cases led to severe financial crises. We will also argue that the case of Egypt is particularly interesting in this regard, since although financial reforms have been enacted, the experience has been rather different: there has been no accompanying financial crisis.

"The Independent European Central Bank: Keynesian Alternatives"

In this paper, the author aims to question the assumptions underlying the economic case for the independent European Central Bank (ECB) and argues that although a European Clearing Agency (ECA) of the type Keynes envisaged for the international economy is not a panacea for the economic problems of the European Union (EU), it is, nonetheless, a better way forward and far superior to the ECB. The paper (1) outlines the theoretical basis of Keynesian monetary and financial theory; (2) aims to ascertain the extent to which credit availability is affected by the creation of an ECB and, on that basis, to offer a critical analysis of current proposals for an ECB; (3) looks closely at the case for the ECA, seen as performing a range of functions rather than having a remit defined simply in terms of strict monetary control, including a commitment to providing the necessary finance for full employment and a responsibility for ensuring that the burden of balance-of-payments adjustment falls upon both deficit and surplus countries.

"Is Financial Globalization Truly Global?: New Institutions for an Inclusive Capital Market"

In 2002 more than $1 trillion worth of new bonds was sold across international boundaries. The total stock of cross-border bond holdings was more than$9 trillion. Such lending, together with sales of equities, is regarded as one of the chief benefits of globalization. But financial investment does not always flow where it is needed most.While it appears that the world cannot be satiated with U.S. securities, issues of emerging economies account for less than 6 percent of total international holdings of debt securities (DÕArista 2003). And, as Argentina discovered recently, international lenders can be fickle, selling enough foreign currency and securities to cause a currency crisis.

"Reforming the Euro's Institutional Framework"

The SGP has been the focus of growing controversy within the eurozone. The ECB continues to argue that reforming the SGP by relaxing its rules would damage the credibility of the euro. The opposite, however, may be closer to reality. Relaxing the rules according to the measures already taken by the European Commission has been inconsequential regarding the euro's credibility. In our view, many more fiscal policy reforms are needed so that the eurozone can realize a true economic recovery and enhance the credibility of the euro.

"The Case for Fiscal Policy"

This paper reconsiders the case for the use of fiscal policy based on a "functional finance" approach that advocates the use of fiscal policy to secure high levels of demand in the context of private aggregate demand, which would otherwise be too low. This "functional finance" view means that any budget deficit should be seen as a response to the perceived excess of private savings over investment at the desired level of economic activity. The paper outlines the "functional finance" approach and its relationship with fiscal policy. It then considers the three lines of argument that have been advanced against fiscal policy on the grounds of "crowding out." These lines are based on the response of interest rates, the supply-side equilibrium, and Ricardian equivalence. The paper advances the view that the arguments, which have been deployed against fiscal policy to the effect that it does not raise the level of economic activity, do not apply when a "functional finance" view of fiscal policy is adopted. A section on the intertermporal budget constraint considers whether this constraint rules out budget deficits, and concludes that in general it does not.

"Aggregate Demand, Conflict, and Capacity in the Inflationary Process"

The dominant view relating to unemployment and inflation is that inflation will be constant at a level of unemployment (the nonaccelerating inflation rate of unemployment, NAIRU) determined on the supply side of the economy (and in the labor market in particular). Further, the economy will tend to converge to (or oscillate around) that level of unemployment. Moreover, demand variables or economic policy changes are thought to have no influence whatsoever on NAIRU. An alternative perspective on inflation would indicate that there would be no automatic forces leading to a level of aggregate demand consistent with constant inflation. Inflationary pressures would arise from, inter alia, a role of conflict over income shares, and from cost elements, with the price of raw materials, especially oil, being the most important. Insofar as there are supply-side factors impinging on the inflationary process, these would arise from the level of productive capacity (relative to aggregate demand) and from conflict over income shares. This paper focuses on the arguments and the evidence that supply-side constraints should be viewed as arising from capacity constraints, rather than from the operation of the labor market.

"European Integration and the 'Euro Project'"

The introduction of the euro has been a significant step in the integration of the economies of the countries that form the European Union (EU) and the 12 countries that comprise the Economic and Monetary Union (EMU). Its adoption not only means that a single currency prevails across the euro zone with reduced transactions costs for trade between member countries; the currency also has become embedded in a particular set of institutional and policy arrangements that tell us about the nature of economic integration in the EU. In fact, the euro is a relatively small step along the path to further economic integration at the global level, and the neoliberal agenda of globalization can be clearly seen from the ways in which the euro has been introduced.

Financial Globalization and Regulation

This paper attempts to define financial globalization as a process whereby financial markets internationally are integrated so closely that they can be considered as a single market. The process, viewed as a by- product of financial liberalization, is only a necessary condition for financial globalization, however. The sufficient condition is the creation of world-wide single currency, managed and regulated by a single international monetary authority. The system itself needs to be managed carefully to avoid the kind of crises countries have experienced over the last 30 years or so. This sufficient condition has not yet been met.Financial Globalization, Financial Liberalization, Financial Regulation