What is a Keynesian Put?
Keynesian put is the anticipation that the government will stimulate the economy through fiscal policy. The government is expected to spend money to continue to grow the economy. In 2016, the term was invented by analysts at the Bank of America Merrill Lynch as a reference to both the Keynesian Economic Theory and the Greenspan Put.
The Keynesian Economic Theory is about how economic output, inflation, and employment are affected by total spending in the economy. The theory focused on how fiscal and monetary policies are used by the government to control the economy. The Greenspan Put refers to monetary policies introduced in 1998 by then Federal Reserve Chairman Alan Greenspan when he used the federal funds rate to support the U.S. economy and to avoid a recession.
Importance of the Keynesian Put
The Keynesian Put is an important economic concept because it represents the promise that the government will enact fiscal policy measures to stimulate the economy, especially if monetary policy is not enough to support the economy. The government is expected to spend money to maintain growth, inflation, and employment levels.
For example, if interest rates are low for government bonds, there may not be enough investors who will purchase the bonds. As a result, the Keynesian put is demonstrated because there may be an expectation that the government will use fiscal policy measures to continue expanding the economy.
Examples of Expansionary Fiscal Policy
- Provide government grants and/or subsidies to businesses to increase their ability to spend money
- Offer transfer payments to individuals
- Reduce income taxes to increase consumer spending
- Reduce corporate taxes to increase business profits and investments
- Increase government spending on goods and services
Examples of Contractionary Fiscal Policy
- Raise income taxes to decrease consumer spending
- Raise corporate taxes to decrease a business’ after-tax profits and investments
- Reduce government spending on goods and services
Evidence of the Keynesian Put
As of late 2020, there is a prevailing global economic crisis arising from the COVID-19 pandemic, leading to a recession in some countries. There were unprecedented increases in unemployment levels across the world and a stock market crash at the beginning of the year. The stock market continues to experience drastic volatility. Many industries are suffering from the adverse effects of the pandemic, and consumer activity remains below normal levels.
As a result of the global economic downturn, there is an expectation of many governments around the world to impose fiscal policies to boost the economy. With the significant fall in GDP in many countries, economists expect the government to increase spending, provide unemployment insurance benefits, and offer financial support to households and small businesses.
In 2008, the Global Financial Crisis resulted in a worldwide global recession. As a result, there was an anticipation for government officials to enact fiscal policy measures. In the United States, the federal government imposed many stimulus measures to support the economy, such as the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009. Both measures included providing tax rebates to Americans.
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