Home > Fiscal Policy, Monetary Policy > George Osborne Correctly Rejects Fiscal Stimulus

George Osborne Correctly Rejects Fiscal Stimulus

George Osborne explained the Sumner Critique to the CBI tonight:

What’s more, without allowing inflation to climb even further above target, a fiscal stimulus three years ago would simply have been offset by less supportive monetary policy, with no net impact on demand.

With the independent MPC judging that the risks to inflation and output are evenly balanced, the same is true today.

So, just as the argument for fiscal stimulus three years ago was mistaken, so is the suggestion for a discretionary fiscal loosening now. Because we have sensibly allowed the automatic stabilisers to operate, our deficit is only just falling in nominal terms.

This is an improved version of the wording Osborne used last time.  Pedantically correct wording, noting the forward-looking nature of monetary policy.

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  1. May 15, 2013 at 23:40

    From an understanding of the Sumner critique to ‘suggesting’ MC adopt NGDP-LT is a small step.

  2. May 15, 2013 at 23:44

    Given that part of the fiscal consolidation George and co executed included raising VAT and muddying the waters I’m not sure he’s completely correct.

    You can’t say “combined monetary-fiscal expansion” without fiscal.

    Still, I appreciate your point.

    • May 16, 2013 at 08:18

      LO, yes, you can add a lot of nuance into this, but most of that is a question of central bank competence, or lack thereof. That “competence” question applies all the time anyway, whether you are cutting or raising VAT.

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