Ken Rogoff writes:
I am puzzled that so many economic pundits seem to think that the solution is
for all governments, rich and poor, to pass out even more cheques and subsidies
so as to keep the boom going. Keynesian stimulus policies might help ease the
pain a bit for individual countries acting in isolation. But if every country
tries to stimulate consumption at the same time, it won’t work. A general rise
in global demand will simply spill over into higher commodity prices, with
little helpful effect on consumption. Isn’t this obvious? Yes, there is still a
financial crisis in the US, but stoking inflation is an incredibly unfair and
inefficient way to deal with it.
In other words, if the initial shocks are real, boosting aggregate demand won’t have much of a positive effect plus it will worsen inflation. Maybe it’s a good thing the stimulus package is too small to be very "effective." Mark Thoma adds comment. I am, however, puzzled by Rogoff’s distinction between a single-country stimulus package and the global combination of such packages. If nominal stickiness is a binding problem in enough sectors, a large enough stimulus can work no matter how many countries do it. If nominal stickiness is not a major binding problem (and I suspect this is the relevant case), then even a single-country stimulus plan will be ineffective.