ABSTRACT
This chapter shows that fiscal policy has been subject of new interest in recent times as an important stabilizing tool available to policy makers in a scenario where conventional monetary policy has been shown to lose its traditional efficacy in dealing with recessions. In particular, as a consequence of the deterioration of public finances following the economic crisis and the needed bailout of part of the banking system, most European economies are now subject to fiscal consolidation policy measures, despite still poor economic conditions after the great recession of 2008/09. In this chapter we compare two different fiscal policy approaches by performing a computational experiment with the Eurace agent-based model. On one hand we have the fiscal consolidation, or austerity program, where a deficit–GDP ratio of 3 percent is targeted by raising taxes and cutting public expenditures if needed, even during recessions; on the other hand, we consider the policy of loosening the fiscal pressure during recessions, resorting to an accommodative monetary policy. Results generally show a better performance of the loose fiscal policy with some warning concerning the combination of monetary expansion with a too-relaxed banking regulation leading to an over-indebtedness of the private sector.
