Fredrik N G Andersson

Docent

Macroeconomic equilibriums, crises, and fiscal policy

Författare

Fredrik N G Andersson

Summary, in Swedish

Fiscal policy plays an important role in alleviating the costs of the crisis. However, recent experiences suggest that the public finances often are unprepared for a crisis. Deficits and debt levels prior to the crisis are commonly too high, limiting the government’s ability to support the economy through the crisis and the recovery phase. In this paper, I argue that theoretical macroeconomic models’ underlying assumption of a stable long-run equilibrium may partially explain why governments fail to prepare the public finance for a future crisis. In the standard equilibrium models, crises are seen as one-off events caused by external factors, which creates a false impression of long-run economic stability. The models thus indirectly indicate that there is no need to prepare for a potential crisis. Using forecast data, I demonstrate how the equilibrium perspective dominates macroeconomic thinking and how it contributes to too-high debt ratios prior to a crisis. I end the paper by discussing how to design fiscal policy rules based on a crisis rather than an equilibrium perspective.

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