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The growth of productivity has a positive influence on aggregate demand and, as suggested by the Kaldor-Verdoorn law, growth of demand has a positive effect on productivity. However, this article shows that in cases of stagnant or recessive aggregate demand, to combat the weakening of the economy, the economic literature suggests intervening with expansionary fiscal policies to increase productivity, investment in infrastructure and R&D expenditure.
Although the central banks of the world’s main economies have implemented expansionary monetary policies to bring down interest rates and therefore stimulate investments, the results have not been up to expectations. Monetary policy has not had the desired effects on the real economy, since the aggregate demand remained weak. The inequalities in income distribution and the ageing of population are related to the secular stagnation.
According to the latest studies, measures of fiscal consolidation have had a negative effect on the economy thereby dispelling the myth of expansionary austerity based on the idea of a negative fiscal multiplier able to promote growth. In line with recent empirical works on the multiplier of fiscal policy, the following analysis shows that variations in autonomous demand (public spending, exports and autonomous consumption) have a strong multiplier effect on the GDP.
Numerous commentators maintain that the 2015 Italian budget is “expansionary”. This article however shows that it does not have a Keynesian character and presents uncertain results. The government’s strategy is to support families’ available income by increasing public funding and cutting fiscal pressure. The analysis also shows that the success of this budget is threatened because it depends strongly on the families’ willingness to spend the greater income made available.