Greg Mankiw recently presented a graph showing that the US is doing much more fiscal stimulus than other big economies during the Covid crisis, even as a share of GDP:
I was struck by the big difference between the US and major European economies such as Germany, France and Italy. According to mainstream macroeconomic theory, the Eurozone economies should have been doing far more fiscal stimulus than the US.
The standard model suggests that monetary policy should steer demand during normal times. According to this view, there might be two situations where fiscal stimulus is appropriate:
1. If a country lacks an independent monetary policy.
2. If a country is stuck at the zero bound, and monetary policy is ineffective.
Both the US and the Eurozone have near-zero short-term rates. In contrast to the Eurozone, however, longer-term rates are well above zero in the US. So the case for monetary policy ineffectiveness is stronger in the Eurozone.
The US has an independent monetary authority that can provide stimulus when needed. Individual Eurozone countries lack such an authority, and thus might benefit more from fiscal stimulus.
This is not to suggest that I believe Eurozone countries should have done more fiscal stimulus. I’m skeptical of the efficacy of fiscal stimulus, and countries without an independent bank have less margin for error in terms of avoiding a debt crisis. Rather my point is that for whatever reason, developed countries are not following the playbook suggested by the standard model of fiscal policy. The US would be expected to do far less fiscal stimulus than the Eurozone countries.
PS. For those interesting in long run debt sustainability issues, I strong recommend David Beckworth’s podcast with Ricardo Reis. It’s a bit technical, but highly informative.