ABSTRACT
This chapter focuses on fiscal and monetary policy with contemporary macroeconomic theory, policy discussions usually assume that employment rates are unaffected by aggregate demand policy in the long run. It encloses closed economies with debt denominated in a fiat currency controlled by the central bank. Demand policy plays a useful role in short-run stabilization but the preferred instrument is monetary policy, complemented by automatic fiscal stabilizers. It should be noted also that many non-fiscal and non-monetary policies that may influence aggregate demand. The relevance of functional finance can be questioned from another angle: policy-makers may, it is suggested, be unable to control the real rate of interest on public debt. This conflict between the ruling theoretical paradigm and the nature of the policy debate is sharpened by the irrelevance of the level of public debt in the benchmark Ramsey model with Ricardian equivalence.
