Monetary Policy trumps Fiscal Policy

Seems we are reliving the 1960s debates over the relative effectiveness of fiscal and monetary policy!

We know that the recovery from the 2007-09 recession has been the weakest ever. But is that really due to “austerity”? Note that during the 2007-09 recession the growth of real public spending was just as strong as during the other recessions, but that didn´t stop this recession from being the most virulent.

But the chart provides us with a chance to test the “fiscal rules” proposition. Observe that real government spending was much stronger following the 2001 recession than following the 1990 recession. In fact, following the 1990 recession government spending basically stayed ‘put’. Ceteris Paribus, one could surmise that the recovery from the 2001 recession was more pungent than that following the 1990 one.

Read the whole article here.