Regardless of whether fiscal stimulus has been the correct policy choice or not, “the price of countercyclical fiscal policies in 2008 and 2009 has been extremely high,” says CASE President, Marek Dabrowski in CASE Network E-brief 12/2009, From fiscal stimulus to fiscal crisis.   Assessing the international response to the global financial crisis, Marek Dabrowski warns that the counter-cyclical fiscal policies enacted, have pushed many developed economies in the direction of a debt trap.  The negative consequences of this trend may lead to “another macroeconomic and/or financial crisis.”

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From fiscal stimulus to fiscal crisis
By Marek Dabrowski

As the global financial crisis entered its most dramatic phase, in the second half of 2008, the International Monetary Fund (IMF), many governments and several distinguished scholars advocated expansionary fiscal policy as the second most effective tool (after monetary stimulus) to fight deep recession and deflation. Now, more than a year later, the previous excitement surrounding the supposed power of fiscal stimulus largely disappeared and instead has been replaced by rising concerns over the sustainability of public finances in many countries. Unfortunately, the previous enthusiasts of the active counter-cyclical fiscal policy have not always realized the causality between the two. (...)