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26 March 2012

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Lulu

Brian,

You talk about Scotland pursuing an independent fiscal policy, but what kind of fiscal policy initiatives would you advocate for? Considering the level of labor and capital mobility, to what extent do you see the stimulus being spent in other countries in either the monetary union or in Europe? And how do you perceive the effect of the additional debt for Scotland, especially since it has no sovereign control over its money supply? How do you think the threat of future taxes will impact economic activity today?

Your post actually inspired some musings on my part on what a devolved fiscal policy structure would look like in the United States. What I considered was that ricardian equivalence would force the subnational units to only pursue stimulus that could increase growth rates to justify the higher levels of future taxes. What are your thoughts on this?

http://synthenomics.blogspot.com/2012/04/fiscal-policy-in-monetary-union.html

Brian Ashcroft

You make some important points. A small open economy will have a small expenditure multiplier due to high leakages. I don't see that Scotland having a comparable debt level to the present UK is a problem per se. But it is more of a problem if an independent Scotland or a fiscally devolved Scotland has to pay a significant premium on its borrowings as California, for example, has to do compared to the US government. I don't believe in ricardian equivalence but even if you do, the likelihood of consumption smoothing suggests real short to medium term demand effects from a fiscal stimulus or contraction. So, a demand stimulus or contraction is still feasible and it is not just about promoting supply.

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