9.2.4—Growth policies

Policies for growth include expansionary fiscal or monetary policy to raise actual output in the short run, and supply-side measures to raise potential output in the long run.

The best mix depends on the output gap, inflation, debt, external balance and the binding constraint. Public investment can affect both AD and LRAS; education takes time but may improve productivity.

During a deep recession, infrastructure spending can use idle labour now and expand transport capacity later. Near full capacity, the same spending may mainly raise prices unless supply expands.

No policy creates costless growth: evaluate financing, implementation lags, distribution, environmental effects and whether demand or capacity is the constraint.