Fiscal policy and new classical macroeconomics

Abstract

It is argued, first, that fiscal policy was not a neglected and indifferent topic for new classicals, and, second, that their sceptical attitude towards monetary policy was not projected directly upon fiscal policy. By analyzing permanent income hypothesis specified both on adaptive and rational expectations and, then, the Barro-Ricardian equivalence theorem, the crucial assumptions supporting the ineffectiveness of fiscal policy are identified. We come to the point that ineffectiveness of fiscal policy can be considered valid only by presupposing some strong and implausible assumptions. It is argued as well that new classicals did not stress the ineffectiveness of fiscal (and also monetary) policy, but identified precisely the conditions under which economic policy strikes a snag. Starting from the Barro-Ricardian equivalence, the theory of non-Keynesian effects is also reviewed arguing for the fact that new classical macroeconomics put an emphasis on fiscal reforms by which it can be possible for governments to get back the effectiveness of countercyclical policy and to control the economy not only by unanticipated operations. To some extent it is clarified that new classical macroeconomics got considerably close to the theory of Keynes sometimes.