conflict theories
The Limits of Monetary and Fiscal Policy
John H. Makin | Economic Outlook
July 14, 2011
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July 2011
Following two rounds of monetary and fiscal stimulus, we are relearning that neither monetary nor fiscal policy is likely to have long-lasting effects on growth or unemployment. The tepid growth of US output and employment in response to two rounds of monetary and fiscal stimulus since 2008 suggests that a third round of either monetary or fiscal stimulus in 2011 would lead primarily to higher inflation and a higher ratio of government debt to gross domestic product (GDP) in 2012.
Key points in this Outlook:
Monetary policy has reached its limits. The significant risk of deflation that prompted last year's second round of quantitative easing has passed, and with inflation rising, monetary stimulus is no longer an option.
Two rounds of fiscal stimulus have produced neither a sustained rise in growth nor a sustained drop in the unemployment rate. Another round would merely increase deficits and debt levels.
Rather than enacting further stimulus, the Federal Reserve should aim for lower, steadier inflation, and Congress and the president should cut spending and reduce tax expenditures to finance lower tax rates and reduce the debt-to-GDP ratio.
US growth slowed during the first half of 2011 while the sovereign-debt crisis ebbed and flowed and unsettled financial markets, just as occurred in the second quarter of 2010. It is no surprise under these circumstances that the Fed has been under pressure to initiate another round of quantitative easing or that the White House, former Treasury secretary Lawrence Summers, former chair of the President's Council of Economic Advisers Laura Tyson, and former vice chairman of the Federal
John H. Makin | Economic Outlook
July 14, 2011
Share on email Share on facebook Share on twitter Share on google_plusone_share Share on linkedin More Sharing Services Share on print
Economic Outlook logo 130
View this Outlook as a PDF
Subscribe to the Economic Outlook series
July 2011
Following two rounds of monetary and fiscal stimulus, we are relearning that neither monetary nor fiscal policy is likely to have long-lasting effects on growth or unemployment. The tepid growth of US output and employment in response to two rounds of monetary and fiscal stimulus since 2008 suggests that a third round of either monetary or fiscal stimulus in 2011 would lead primarily to higher inflation and a higher ratio of government debt to gross domestic product (GDP) in 2012.
Key points in this Outlook:
Monetary policy has reached its limits. The significant risk of deflation that prompted last year's second round of quantitative easing has passed, and with inflation rising, monetary stimulus is no longer an option.
Two rounds of fiscal stimulus have produced neither a sustained rise in growth nor a sustained drop in the unemployment rate. Another round would merely increase deficits and debt levels.
Rather than enacting further stimulus, the Federal Reserve should aim for lower, steadier inflation, and Congress and the president should cut spending and reduce tax expenditures to finance lower tax rates and reduce the debt-to-GDP ratio.
US growth slowed during the first half of 2011 while the sovereign-debt crisis ebbed and flowed and unsettled financial markets, just as occurred in the second quarter of 2010. It is no surprise under these circumstances that the Fed has been under pressure to initiate another round of quantitative easing or that the White House, former Treasury secretary Lawrence Summers, former chair of the President's Council of Economic Advisers Laura Tyson, and former vice chairman of the Federal