In this paper we analyse countercyclical fiscal policy within the context of a microfounded analysis of business cycle stabilisation. We show that tax and spending instruments can have a useful counter cyclical role, even after allowing for the distortionary nature of the instruments and the...

How do economic policy mistakes happen? One view is that policy makers are benevolent, and errors arise because economic theories are inadequate. Another is that policy makers pursue sectional interests that may have no relation to any academic consensus on good policy. This paper examines a...