Things have changed since the financial crisis, however. Governments have been putting fiscal policy to use for stabilization purposes, and New Keynesians have jumped on the bandwagon. Bullard's paper argues, in light of the evidence and the economics literature, that the pre-financial crisis view is entirely appropriate, i.e. fiscal policy should focus on the long run and leave the short run to the central bank. Bullard says:
In short, existing political processes are, generally speaking, far too cumbersome and contentious to enact effective and timely short-term actions in response to market events. They are ill-equipped to deliver the types of subtle tax and spending interventions that may actually be effective according to a careful reading of the available macroeconomic literature on the topic.Here's part of what the content of the paper is about:
I will describe and comment on two strands of the macroeconomic literature in this area, one highly formalized and the other intuitive but rhetorically potent. The first is the heavily studied fi scal multiplier idea in the context of New Keynesian DSGE macroeconomics. The second is less studied and not formally articulated very often. It is that a substantial increase in de ficit-financed government purchases sends a signal to the private sector that a high growth regime is possible and likely going forward. This could influence private sector expectations and lead to a virtuous equilibrium in which actual output and employment are high. Rhetorically, this seems to be what many advocates have in mind, even if this is not what happens inside most of the macroeconomic models used to analyze this issue.This is interesting, as it highlights an aspect of policy recommendations coming from hardcore Keynesians - Krugman for example - that do not make clear what the underlying source of inefficiency in the economy is. From a Keynesian point of view, the inefficiency could be sticky wages and prices, on the one hand, or a coordination failure, on the other. What the policy response should be depends on the inefficiency, though not every Keynesian understands this. As Bullard states, the type of coordination failure that some Keynesians appear to have in mind - self-fulfilling beliefs about the future driven by fiscal policy - has not really been formally studied.