CHAPTER 5. FISCAL POLICY AS A COUNTERCYCLICAL TOOL
- International Monetary Fund. Research Dept.
- Published Date:
- October 2008
This chapter investigates whether fiscal policy should be used to combat business cycle fluctuations, especially downturns. Can discretionary fiscal policy successfully stimulate output? Or does it do more harm than good? New evidence presented here, from emerging as well as advanced economies, indicates that the effects of fiscal stimulus can be positive, albeit modest. But policymakers must be very careful about how stimulus packages are implemented, ensuring that they are timely and that they are not likely to become entrenched and raise concerns about debt sustainability. The chapter concludes with a discussion of how automatic stabilizers could be made more effective and how governance improvements could reduce “debt bias” concerns related to discretionary actions.