Reassessing Discretionary Fiscal Policy

Abstract: Recent changes in policy research and in policy-making call for a reassessment of countercyclical fiscal policy. Such a reassesment indicates that countercyclical fiscal
policy should focus on the automatic stabilizers rather than discretionary actions. Monetary policy has been reacting more systematically to output and inflation; long
expansions in the 1980s and 1990s demonstrate the effectiveness of such a policy. It is unlikely that discretionary countercyclical fiscal policy could improve things, even if
there were less uncertainty about fiscal impacts. A discretionary countercyclcal fiscal policy could make monetary policy-making more difficult. Rather discretionary fiscal
policy should focus on long run issues, such as tax reform and social security reform.