Abstract
Along with the global financial crisis that took place in 2008, the ineffectiveness of other policies used for exiting from the crisis has brought back the feasibility of fiscal policy as an alternative. It is accepted that the only way to overcome the severe shrinking of the total demand during the 2008 global financial crisis is expansionary fiscal policy applied globally. However, differences in the subjective conditions of the EU member countries in particular have not made it possible to implement an expansionary fiscal policy for all of the member countries. More developed EU countries have begun to carry out from expansionary fiscal policies, while the less developed ones have begun to conduct contractionary fiscal policies. With the awareness that the financial stability is a public good, the obstacles, challenges on the global fiscal policy implementation by the EU member states are discussed by examining fiscal policies performed during and after the 2008 global financial crisis.
TopKeynes And The Fiscal Policy
The crisis of 1929 represents an important disintegration in terms of the theory of public finance. Fiscal policy approaches differ before and after the 1929 crisis in the public finance literature. Prior to 1929 crisis classical fiscal approach (“fiscal conservatism”) was dominant, while modern fiscal approach (interventionist) became dominant during post 1929 crisis era.
During pre-1929 crisis period, it was widely believed that there would not be any problems in the economy as long as the each supply create its own demand. The 1929 crisis emerged as an important event that shows that this notion is not valid. In that period, it was seen that every supply did not create its own demand and the economy would not always move in the expected direction, and subsequently the need for government intervention to the economy was come to the fore. The birth of modern fiscal approach coincides with these years.
Key Terms in this Chapter
Expansionary Monetary Policy: Expanding money supply by lowering interest rates, reducing reserve requirements for banks or buying Treasury notes.
Contractionary Monetary Policy: Use of monetary policy (raising interest rates, selling treasury notes, or reserve requirements) in order to reduce inflation.
Expansionary Fiscal Policy: Use of fiscal policy by increasing government spending or cutting taxes.
Contractionary Fiscal Policy: Use of fiscal policy by decreasing government spending or raising taxes.
Eurozone Crisis: Economic downturn starting initially from Portugal, Ireland, Spain, Greece and Italy with symptoms of the collapse of financial institutions, high government debt, and raising yield spreads in government securities within the Euro area in 2008.
Great Recession: Global economic turmoil emerging from the US residential mortgage market and spreading to global financial markets as well as real sectors in 2007-2009 period.
Monetary policy: The action of monetary authority in identifying the size and rate of money supply.
Great Depression: The worst economic downturn starting after stock market crash of October 1929 and lasting to 1936.
Fiscal policy: Implementation of tax policies, government spending, and borrowing in order to affect macroeconomic determinants including inflation, employment, economic growth, or aggregate demand.