ABSTRACT

Progressive economists agree that in a liquidity or deflation trap, fiscal stimulus is part of the solution, andperhaps even theonly solution.There is somedisagreement about the need for fiscal consolidation (active policy to stabilize or reduce the debtincome ratio) in the long run after the storm has passed, a position Paul Krugman (2011) succinctly summarizes as “jobs now, deficits later.” This paper attacks the problem using a model that has recognizably Keynesian components, but which has Classical characteristics as well, following an approach laid out in Foley and Michl (1999, ch. 10). The model descends with modification from a similar effort (Michl, 2008) devoted to analysis of inflation targeting. Since the basic model exhibits the paradox of thrift in the short run but not in the long run, it is not too inaccurate to describe it as “short-run Keynesian, long-run Classical.”