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Thursday, November 18, 2010

Economics: The Two Cultures

Ethan Ilzetzki of the London School of Economics and Enrique G. Mendoza and Carlos A. Vegh of the University of Maryland examined stimulus efforts in 44 countries. In a recent National Bureau of Economic Research paper, they argued that fiscal stimulus can be quite effective in low-debt countries with fixed exchange rates and closed economies.

Stimulus measures are generally not as effective, on the other hand, in countries like the U.S. with high debt and floating exchange rates. The authors of the paper pointed to a series of specific circumstances that complicate, to say the least, the effectiveness of increasing public spending: How much stimulus money ends up flowing abroad? What is the relationship between fiscal policy and monetary policy? How do investors respond to fear of future interest rate increases?

For more, see The Two Cultures by David Brooks, November 15, 2010 at The New York Times.

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