Abstract
This paper analyses why the coordination of macroeconomic policies is essential to deal with the Euro crisis. The building blocks of the European macroeconomic policy—the Junker Investment Programme and the ECB Quantitative Easing programme—are not considered a sufficient answer to this problem. The paper suggests that a fiscal stimulus can and must be designed so as to target both aggregate demand and potential output. Total investment is considered the key-variable in this approach and both private and public investment should be furthered, to the extent that the public capital stock is a driver of growth, directly entering in the firms’ production function or shifting total factor productivity. To this aim, a sizeable programme of public investment could be implemented without affecting public debts through a conditional and temporary overt monetary financing. The paper also argues that revenue neutral tax shifting may help in making sustainable this strategy, enhancing potential output without raising the government deficit.
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- 1.
Every economist educated in the neoclassical theory of growth knows the answer suggested by Phelps (1961), that is the “golden rule” of capital accumulation.
By the way, we are tempted to observe that, in this framework, the inequality r > g, which epitomized Piketty’s celebrated theory of inequality, is absolutely familiar. The condition that rate of return on capital (corresponding in equilibrium to the marginal product of capital) exceeds the rate of growth naturally arises as a steady-state condition when the saving rate is too low to bring the capital stock over the level of the Phelps’ Golden Rule. In this framework, at most, the problem was r < g, because in this case the economy was accumulating too much capital. This dynamic inefficiency is considered by Andrew et al. (1989). A balanced growth path is dynamically inefficient if the rate of return is lesser than the rate of growth. If the return on capital is its marginal product, it can be measured by the capital income/capital stock value ratio, which in US is far greater than the growth rate. See Mankiw (2014).
- 2.
Obviously, in the steady-state equilibrium a higher capital stock per capita and hence a higher income per capita implies a higher saving rate, ant this does not automatically guarantee a higher consumption per capita. The golden rule of the previous note states the condition that must be satisfied in order the equilibrium capital stock matches the maximum level of consumption.
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Felli, E.L., Tria, G. (2017). The European Policy Framework: A Lack of Coordination Between Monetary Policy and Fiscal Policy. In: Paganetto, L. (eds) Sustainable Growth in the EU. Springer, Cham. https://doi.org/10.1007/978-3-319-52018-6_5
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DOI: https://doi.org/10.1007/978-3-319-52018-6_5
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