Since August 2007, the world economy has fallen into recession and been confronted by a severe financial crisis. In the midst of this global recession, what hope can we place in the fiscal stimulus plans that have been announced? This Working Paper evaluates whether the measures implemented in the euro area and the US will be adequate responses. It indicates that while these measures will undoubtedly prove useful in limiting the scale and duration of the downturn, they will not be sufficient by themselves to prevent a lengthy recession followed by a tepid recovery. The paper argues that to maximise the effectiveness of the stimulus plans, they should be accompanied by accommodative monetary policy. Furthermore, to accelerate and underpin a recovery in global economic activity, fiscal and monetary policies should also be supplemented by measures aimed at re-establishing banking and financial sectors that function properly.
Patrick Van Brusselen is an economist at the Belgian Federal Planning Bureau. He is in charge of the work on the Bureau’s world macroeconometric model NIME and is the author of the Bureau’s regular publication, The NIME Outlook for the World Economy.