Question 3 of 5Change question

Should governments borrow more in a recession?

For a euro-area country this is partly a legal question too: EU fiscal rules set limits on deficits and debt.

Mainstream
Keynesian economics
Yes. When resources are idle the multiplier is above one, so borrowing to spend supports output.
Mainstream
New classical and real business cycles
It may do little: households expect future taxes and save the tax cut (Ricardian equivalence, Barro 1974). Evidence suggests the full version doesn't hold.
Mainstream
New Keynesian economics
Monetary policy first; fiscal policy matters most when interest rates are stuck near zero. IMF work in 2013 found forecasters had underestimated multipliers during austerity.
Mainstream
Ordoliberalism
Only within agreed rules. Credible fiscal rules protect trust in the currency.
Heterodox
Austrian school
No. Deficits prolong the misallocation and crowd out private investment.
Heterodox
Post-Keynesian economics
Yes. Government deficits are the mirror image of private-sector saving (Wynne Godley's sectoral balances).
Heterodox
Modern Monetary Theory
Yes, and deficits are normal for a currency issuer. The limit is inflation, not debt.

Keynesian economics