Once Again: Fiscal vs. Monetary Stimulus

     Delong just posted a pretty good tackling of this issue which is welcome. After Monetarists, like Sumner, et al. have spent so much time trying to convince us that fiscal stimulus is wrong and fruitless finally we have a quality Keynesian stepping into the question.

      http://delong.typepad.com/sdj/2012/03/thoughts-on-monetary-vs-fiscal-policy-in-a-liquidity-trap.html

     To be sure this is in a long tradition like when Friedman and Walter Heller co-sponsored a book together that tried to put both arguments together.

     While it's tempting to frame this as Monetarists vs. Fiscalists, there is a certain asymmetry between the two. Monetarists desire to only use monetary policy to deal with downturns and recessions. The "Fiscalists" don't claim that monetary policy plays not part.

       Here is how Delong finishes the above linked post:

       "Thus fiscal and monetary policy are likely to both have proper stabilization policy roles to play."

        The main reason to prefer monetary to fiscal policy is that the latter is held to be distortionary:

         "the claim that monetary policy is non-distortionary is subject to question when the real interest rate that produces total spending equal to potential output is negative. In such a case, monetary policy works by artificially pushing the real interest rate r down well below its full-optimum level to compensate for other market failures. The relative overproduction of long-duration and underproduction of short-duration assets in the present is not small, and the claim of no first-order losses is not clearly relevant."

      "In addition, there are the behavioral-finance fears: a market in which interest rates are very low is a market in which many financial institutions will make inappropriate judgments about long-run risk and return, as they find themselves driven by institutional and other imperatives to “reach for yield”. [7] A low cost of funds makes mark-to-model accounting easier to sustain. When the cost of funds is substantial, maintaining positive cash flow requires much more frequent testing of models by marking-to-market. And an entire financial industry engaged in unchecked mark-to-model accounting is dangerous."

      "It is important to get the overall level of production right--to match total spending to potential output. It is also presumably important to direct spending toward high-value commodities. It is important to get the balance between private and public purchases right. And it is important to get the balance between short-duration and long-duration assets right."

     "Thus fiscal and monetary policy are likely to both have proper stabilization policy roles to play."