Practical Stabilization Policy in the Twenty-First Century

In 1997, the American Economic Association convened a panel to address whether a core of usable macroeconomics exists. The consensus about monetary policy has not changed since then. However, in a sharp reversal, there is now widespread consensus that fiscal policy can be a useful stabilization tool. I discuss why the latter consensus broke down and what form countercyclical fiscal policy should take in a world marked by two constraints: (i) The benefits of the policy ought to be robust to deviations from rational expectations and the presence of liquidity-constrained consumers, and (ii) expanded fiscal stabilization policies are temporary.