Monday, 8 July 2013

NO PLAN B: BUT IS THERE A ‘THIRD WAY’?

By Kent Matthews

Abstract
This paper reviews the argument for a slowdown in the fiscal consolidation policy of the UK government. It reviews the existing literature and the evidence of the interwar period in the UK where a recovery occurred without a relaxation of the tight fiscal regime of the period. It argues that even in a zero-lower-bound, the evidence for a plan B is weak. Given that there may have been significant capacity destruction, the paper suggests a third way that calls for a supply-side framework that sets the condition for an improvement in long-term growth and productivity.

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