Pavlina R. Tcherneva: Fiscal policy on shaky foundations: Post Keynesian and Chartalist lessons for New Consensus economists

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Fiscal policy on shaky foundations: Post Keynesian and Chartalist lessons for New Consensus economists

25 pp.
4.12 EUR
(October 2009)

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Pavlina Tcherneva also addresses fiscal policies in the NCM in her chapter on “Fiscal policy on shaky foundations: Post Keynesian and Chartalist insights for New Consensus economists”. She argues that the New Consensus has reintroduced fiscal policy effectiveness into the mainstream by developing the Fiscal Theory of the Price Level (FTPL). This return to fiscal policy, however, is on rather shaky foundations, because the FTPL has potentially devastating implications for the presumed macroeconomic consensus. The theory challenges the very existence of hard and binding inter-temporal government budget constraints, the determination of prices on the basis of the quantity equation relationship, and the possibility for conducting independent monetary policy. Nevertheless, the FTPL has also made important new contributions to the mainstream literature with regard to the unique nature of government liabilities. This represents an important point of convergence between New Consensus economists, such as Woodford and Bernanke, and those Post Keynesians who subscribe to the Chartalist tradition, Tcherneva claims. The latter have long argued that sovereign currency nations do not face operational constraints to government spending. According to Chartalism and the FTPL, government debt and deficits are forever sustainable. Despite the apparent common ground, the two approaches reach diametrically opposed conclusions about the stabilisation effects of fiscal policy. In the New Consensus, government spending remains inherently inflationary and distortionary and should be employed only in extraordinary and deflationary circumstances. For Chartalists, fiscal policy can be conducted in a manner consistent with full employment and price stability. While Post Keynesians have made the case for functional finance, the new mainstream developments have only served to bolster support for sound finance policies and do not represent a genuine return to fiscal policy effectiveness.

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