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"Overall we now have a fiscal stimulus in the global economy," writes Global Chief Economist Janet Henry. "It is not large, but it is getting bigger and, for the first time since 2010, we estimate that global government spending will grow more quickly than global GDP."
This news is music to the ears of international organizations such as the International Monetary Fund as well as financial heavyweights like former Fed Chair Ben Bernanke and BlackRock's Larry Fink, who have long argued that governments should play a larger role in driving growth.
The reasons for the pick-up in spending are manifold: Chinese authorities are pulling fiscal levers to buoy activity, state-level spending has increased in the U.S., Germany has been forced to expand spending in light of the refugee crisis, France's leaders have cut corporate taxes in a pre-election year, and in Canada, a new government is increasing investments in infrastructure.
In fact, standard models may already have broken down. Zero interest rates have failed to incentivize the kind of consumption and investment booms that we might have expected. Companies are hoarding their cash. Savings rates have actually risen, not fallen. It’s possible that this is due simply to a very long, persistent negative shock to demand, but it’s also possible that we’re just not in a New Keynesian world right now. Maybe some other theory, like Roger Farmer’s regime-switching model, or a Neo-Fisherian model, or a financial macro model, is in effect.
If the world isn’t in the comfortable, well-known New Keynesian territory, then policies designed to fit a New Keynesian model run the risk of backfiring. If Neo-Fisherism is right, very negative rates would cause damaging deflation. If financial frictions are now the driving force of the business cycle, negative rates could damage banks as Stiglitz and others have intimated.