What do we know about the effects of expansionary fiscal policy - lessons from the great crises

Abstract

This paper first describes the design and functioning of fiscal policy during the Great Depression – mainly on the example of the USA. Then it summarizes the debates and different assessments of the efficiency, i.e. inefficiency of the fiscal stimuli during the Great Depression. These estimates, for reasons of objectivity, are placed within the historical context of developments in the 1930s: dominance of the liberal economic philosophy; the “boom” of economic activity in developed countries in the period 1922 – 1929; insufficiently developed macroeconomic science and the increasing influence of Keynes’s economic concepts before and during the crisis. Later, the effects of expansionary fiscal policy used for addressing the challenges of the Great Recession are analyzed. In this context, the paper provides the dilemmas and controversies regarding the estimation of the value of fiscal multipliers and the limits of discretionary fiscal policy – especially those related to the accumulation of structural budget deficits and the growth of public debt. In spite of the present controversies and dilemmas about the real possibilities and limits of expansionary fiscal policy, the authors especially/particularly highlight the viewpoint that fiscal stimuli, in time of severe and prolonged recessions, in the presence of a dysfunctional banking system and interest rates near the zero low bound rate, function well. In the end, the paper summarizes the lessons from the experience about the effects of expansionary fiscal policy during severe and prolonged recessions, as lessons for the Republic of Macedonia.