Impact of Global Financial Crisis on Fiscal Policy Essay

Impact of Global Financial Crisis on Fiscal Policy - Essay Example Battaglini and Coate (2008) presented the political economy model. The model was meant to understand the influence of the fiscal policy that it has on the Business cycle (Barseghyan, Battaglini & Coate, 2013). The model is based on the predictive premise that the fiscal policy is counter-cyclical in nature and that debt tends to decrease in periods of economic boom while increases during the period of economic recession (Barseghyan, et. al., 2013). Tax rates increase during the period of recession while lowered significantly during the boom period and vice versa holds true for public spending (Barseghyan, et. al., 2013). Under general belief the stabalising effects generated by the counter-cyclical fiscal policies is generated through automatic stabalisers and discretionary actions; but the counter cyclical policies have led to an increase in the government debt and also obligated the government to debt services in the coming future (Gordon & Leeper, 2005). Counter cyclical policies can be counterproductive as they require their financing from high tax rates, low spending and elevated financial growth in the future; and also this tends to leave no space for any other business cycle other than itself (Gordon & Leeper, 2005).Austerity means to reduce the public sector expenditure to enable reduction in the debt (Konzelmann, Wilkinson & Davies, 2003). This is only effective if the economy has economic growth to speak of (Konzelmann, et. al., 2003). The government of t