Why Is a “Good” Fiscal Policy Difficult to Pursue?
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Publication date: 2012-02-29
GNPJE 2012;253(1-2):25-40
The paper examines the impact of political factors on fiscal policy. The author’s main interest is in the political determinants of misguided, ineffective fiscal policies. Politicians tend to pursue their own interests and use fiscal policy to achieve their own goals, the author says. As a consequence, they usually run up excessive budget deficits and public debts. Often, fiscal policy becomes procyclical and reinforces the negative effects of the crisis instead of alleviating them. The author examines liquidity constraints at a time of recession, the polarization of social preferences, information asymmetry and conflicts of interest as factors that make a good fiscal policy difficult to pursue. The analysis confirms that the personal interests of those in power strongly affect their fiscal policy. This explains why fiscal policy is often ineffective and generates an excessive budget deficit and public debt, Działo says. Another research area is the role of fiscal policy and fiscal incentives at a time of global economic crisis. According to Działo, an excessive deficit and debt are in part due to a lack of a common fiscal policy in the euro zone. Better coordination of fiscal policy in EU countries could help limit the negative impact of the financial crisis on EU countries, the author says. Działo also investigates the problem of fiscal and monetary policy coordination (policy mix), which is especially important for euro-zone countries pursuing a common monetary policy and different national fiscal policies. An expansionary fiscal policy pursued in many euro-area countries forces the European Central Bank to raise interest rates for fear of inflation, the author says. This leads to not only higher interest rates, but also a further increase in the level of public debt.
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