Fiscal Policy Under Uncertainty

Fiscal policy is interesting again. As interest rates hit rock bottom during the global financial crisis, the burden of lifting demand fell upon governments. This thesis explores three related issues that have surfaced in the aftermath. Once the storm passed, decisions had to be made about how fast and when to withdraw stimulus — chapter two shows that implementing austerity may not always be plain sailing. How much belt tightening is needed after a crisis? That depends crucially on the amount of slack in the economy – revenue will grow and spending will fall naturally as the economy recovers. The third chapter quantifies the challenge of measuring the output gap in real time and shows how this carries over to estimates of structural borrowing. Finally, the next crisis cannot be too far away. But when should a government junk its budget plans and loosen the purse strings? The trigger for that is the topic of chapter four.