![]() Next, I add discrete jumps and policy-regime switches to the model in order to tell a story of a financial crisis followed by a move to fiscal austerity. To bring in fiscal policy, I make use of a rule with either (1) dual targets of capacity utilization and public production, or (2) a balanced-budget target. The nonlinear version of the 2D model incorporates curvilinear functions for investment and consumption out of unearned income. In light of recent world events, this paper seeks to improve our understanding of the dynamics of fiscal policy and financial crises within the context of two-dimensional (2D) and five-dimensional heterodox models. Few would disagree that various paradoxes of austerity or stimulus might be relevant, but such issues can be clarified a great deal with the help of a complete heterodox model. Issues of this kind involve endogenous changes in tax revenues that occur when output, real wages, and other variables are affected by changes in policy. Many also worry that fiscal austerity plans will only bring higher deficits. ![]() Recently, some have wondered whether a fiscal stimulus plan could reduce the government’s budget deficit. Williams’ proposed solution is to impose macroeconomic discipline on federal policymakers by creating automatic stabilizers that take decisions about the level of state fiscal aid in a recession out of their hands. As such, they cannot be considered agents in a moral hazard problem when receiving support from the federal government during a recession.įrom the perspective of this policy brief, the operative moral hazard problem is one in which federal-level politicians reap a political benefit from a seemingly principled refusal to increase federal spending, while avoiding blame for crisis and austerity at the state and local government level. ![]() Utilizing the work of Michael Pettis, Williams demonstrates that a government unable to design its own capital structure is not meaningfully an agent with respect to the business cycle. This policy brief by Alex Williams challenges this unreflective argument and, in response, offers a novel framework for understanding the relationship between the business cycle and fiscal federalism in the United States. The mainstream fiscal federalism literature has led to an instinctive belief that states receiving fiscal aid during a recession are taking advantage of the federal government in pursuit of localized benefits with dispersed costs.
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