Summary

The last economic crisis in 2008-2009 led to rethinking the effectiveness of macroeconomic and fiscal policies. During the 2008-2009 recession, both developed and developing countries had to make an improvised policy decision to stimulate the economy by increasing aggregate demand. While in the pre-crisis period, more frequently monetary policy was addressed for stimulating the economy, already in the post-crisis era, most economists agree that in some situations fiscal policy can be more effective, and the opinion that monetary policy is more flexible and can be free from political pressure gradually diminishes (Blanchard, O., Rajan, R. G., Rogoff, K. S., Summers, L. H. 2016).

After the 2008 crisis, both developed and developing countries have introduced fiscal stimulus programs in response to economic downturns (Shome 2012). The monetary policy aimed at boosting economic activity by raising the money supply did not work as the money multiplier and bank circulation collapsed. As monetary policy has been weak in some cases, the main hopes for economic recovery have been fueled by fiscal stimulus, which has an opportunity to act through tax cuts and increased government spending. However, because of a lack of experience and lack of predictability, policymakers in crisis countries had to make unforeseen decisions, which resulted in rapidly increased government dept ratios to GDP.

Since then, states have shifted from a stimulating economy to a debt stabilization policy, while countries have yet to recover from the shock of a sharp decline in aggregate demand caused by the crisis. That is why a deeper study of the effects of fiscal policy and the need to introduce a new paradigm is one of the lessons we have learned from the recent economic crisis.

To Feldstein’s opinion, recessions, especially recessions caused by the financial crises last long enough to implement the fiscal policy as a stimulating mechanism (Feldstein, The Future of Fiscal Policy 2016). Only, it is important to introduce the right fiscal instruments and develop new fiscal indicators that can identify risks in a timely manner. Buti (Buti 2016) emphasizes the importance of planning long-term fiscal policy so that countries can aggressively use the fiscal instrument needed in times of crisis. DeLong also, (DeLong 2015) discusses the level of public debt in the twenty-first century and increased government spending. Even more, we should expect larger government size in the future since most economies are gradually shifting to sectors where market failures are more likely to happen (education, healthcare, information products) and therefore the role of fiscal policy is expected to increase in the future (DeLong, 2015).