by Scott Sumner
September 11, 2013
Many observers have been perplexed by the slow recovery from the 2008 recession. In the United States, Congress passed a nearly $800 billion stimulus in early 2009, yet growth remained sluggish. More recently, a shift toward fiscal austerity does not seem to have noticeably slowed the rate of economic growth. This seems to go against the textbook Keynesian model, which says fiscal stimulus has a multiplier effect on GDP; however, we shouldn’t be surprised that fiscal policy seems less effective than anticipated. Why has the effect of fiscal stimulus been so meager in recent years? The most likely explanation is monetary offset, a concept built into modern central bank policy but poorly understood.