1 Fiscal Policy in the Crisis 1. The Keynesian Perspective –Multipliers –Ricardian Equivalence 2. The Run-up to the Crisis 3. Response to the Crisis –Did it work? –Was it worth it? 4. The Future of Fiscal Policy –Exit –Lessons from the Crisis

2 The Keynesian Multiplier Y = c (Y – t(Y) – T) + I + G + X – M dY/dG = 1/(1-c+ct) dY/dT= -c/(1-c+ct)

3 Ricardian Equivalence (H)(y 1 - t 1 - c 1 ) (1 + r) + (y 2 - t 2 - c 2 ) = 0 (G)(g 1 - t 1 ) (1 + r) + (g 1 - t 2 ) = 0 __________________________________ (H)(y 1 - c 1 ) (1 + r) + (y 2 - c 2 ) = t 1 (1 + r) + t 2 (G)g 1 (1 + r) + g 2 = t 1 (1 + r) – t 2

4 Run-up to the crisis Debt in percent of GDP Source: OECD Economic Outlook Database.

5 Position before the crisis, 2007 Source: OECD Economic Outlook Database.

6 Position after the crisis, 2010 Source: OECD Economic Outlook Database.

7 Government debt, 2012 % of GDP Source: OECD Economic Outlook Database.

8 Estimated consolidation needs Difference between debt-control and baseline underlying primary surplus % of potential GDP