Too much blood in terms of unemployment and sweat in terms of intellectual effort has been spent on trying to determine the amount of fiscal space that economies have – our policy focus instead should be on what to do with the fiscal space that almost all advanced economies (and a surprising number of emerging market economies) actually have.
This realization begins with the failings of making misleadingly precise guesses about the output gap and various other not directly observable measures as a driver of policies within the state. Starting with Posen (1998, 2001) on restoring Japan’s economic growth, there has been a mounting attack on official sector output gaps being biased downwards by repeatedly estimating recession outcomes as the trend. Also, building on this analysis of Japan in the 1990s versus 2000s, and subsequent experience globally, has been opposition to the idea that fiscal austerity or even just fiscal inaction are the right responses to a...
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