Olivier Blanchard and Lawrence H. Summers: Evolution or Revolution: An Afterword: "Since... we wrote... neutral... have likely declined even as the crisis has receded. The notion that low rates largely reflected the after-effects of the financial crisis and would slowly fade away has simply proven wrong.... Fiscal policy has continued to be expansionary in Japan and has turned strongly expansionary in the US and mildly expansionary in Europe.... Inflation has barely reached the Fed’s inflation target.... In the euro area and in Japan, inflation remains below target.... Output is still below potential, at least in the euro area and in Japan.... These facts lead to the inevitable conclusion that fiscal policy will have to play a much bigger role in the future than it has in the past.... For a long time, economists looking at Japan pointed to mistakes in policy and excessive reliance on deficits; it is now clear that the Japanese macroeconomic response was, on net, the right one.... We noted... that both the Depression and the Great Inflation of the 1970s led to dramatic changes in macroeconomic thinking–much more dramatic than have yet occurred in response to the events of the last decade. We think it is increasingly likely that this gap will close in the next few years...


#noted

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