If monetary policy becomes powerless to boost

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Unformatted text preview: lus (liquidity trap). • If monetary policy becomes powerless to boost economic activity that is lowering fund rates does not necessarily cause other interest rates to fall. • When policymakers want to achieve full employment with higher interest rates rather than lower interest rates (Monetary accommodation). Studies have shown that there are larger multiplier effects with monetary. • In addition, fiscal stimulus used in combination with monetary stimulus can reduce the uncertainty about the total thrust provided to the economy. Thus, monetary policy and automatic countercyclical fiscal stabilizers alone have been proved insufficient in the current situation and implies the necessity of fiscal stimulus along with an accommodative monetary policy as the fiscal consolidation progresses. However, in deciding whether to use fiscal policy, countries must also pay attention to • Fiscal space available and to the credibility of fiscal authorities. • Confidence or scepticism of the economy about stimulus • Affordability in terms of adequate international reserves What constitutes a well executed fiscal stimulus? • An optimal fiscal package should be timely, large, diversified, contingent, and temporary but lasting till the recession persists, sustainable and well executed • In countries in which fiscal space is limited, it is important to focus fiscal stimulus actions on those measures that have the largest multiplier effect on aggregate demand—targeted...
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This document was uploaded on 01/14/2014.

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