martin redrado : fiscal space for stability, growth and social inclusion remarks by mr martin redrado, governor of the central bank of argentina, at the g - 20 workshop, buenos aires, 19 - 20 june 2008. * * * as many have mentioned, it could be a rarity to find a central banker addressing on fiscal policy. but, as we have been discussing over the two days of this workshop, the growing complexity of the world economy poses major challenges to policy makers. and, definitely, the ability and flexibility to coordinate the different branches of economic policy lay as one of the most significant. it seems long ago when keynes realized that there was more room for fiscal policy than just being a public good provider. i believe it wasn ’ t just a coincidence that it was him, being a specialist in monetary issues, who came out with an answer to, probably, the most intriguing problem of his time. his extraordinary comprehension about how the economy works planted the seeds for the emergence of a macroeconomic theory, which we are still working out and improving on a daily basis. in my opinion, we have a debt of honor to his legacy given the long misinterpretation and wrong pursuing in economic policy on his word. the analysis of public finance has many sides, some of which were addressed along this workshop. from a theoretical standpoint, we can not state that a clear cut effect from fiscal policy on growth. for instance, neoclassical growth models in the solow ’ s spirit account for the government basically as a tax collector, showing that the impact on consumers ’ behavior depends on savings pattern derived from the usual consumption optimization process. this ultimately implies that fiscal policy can only determine the level of income, but can hardly affect the pace of economic growth. these models have become an engine for the analysis of fiscal policy and taxation. in my view, these kinds of frameworks are robust in terms of describing some stylized facts for free - market environments with very simplified hypothesis. however, they are not able to address some empirical regularities, which are more usual in emerging countries. the vast amount of unemployed resources, including the capacity of the public sector to take the first step in solving this inefficiency is just one example. on the other hand, endogenous growth models acknowledge that fiscal policy is one of the key factors in explaining the different growth rates among countries. but according to this line of thinking, as well as the classical models, a rise in public expenditure has

. in fact, until not long ago, the consensus in academia on monetary policy mostly overlooked the issues related to structural change and uncertainty – as reflected, for example, in lars svensson ’ s presentation at the 1999 jackson hole symposium. this literature implicitly assumed that we, central banks, were aware of the true economic model, that we were able to correctly observe all relevant variables, and that we accurately knew the nature and sources of the various random forces affecting the economic system. in this conceptual approach, the only remaining “ uncertainty ” was actually the effective value of these stochastic disturbances. in terms of the knightian distinction between risk and uncertainty, it was, at most, a risk situation where policymakers seemed to know the random distribution within the various contingencies. they also seemed able to quantify the likelihood of the several possible events occurring, ultimately assuming that the future would replicate the past. however, in most cases central banks evidently face a quite different reality : many risks are essentially not quantifiable because quite often not only the likelihood of each individual event is unknown, but also the whole range of possible contingencies. in short, uncertainty makes monetary policy implementation an extremely hard task, even in industrial economies. in emerging countries, where institutions are still in the process of consolidation, the central banker ’ s task is even harder : the instruments have a limited power and the boundaries between the scenarios which require intervention due to market failures and those that belong to the usual turbulences in a dynamic market are not so well - defined. this is especially true for countries that have had a fixed exchange rate for decades and, for several reasons such as fiscal, financial, or external dominance, have suffered from macroeconomic instability, marked by currency substitution and the dollarization of liabilities, which have hampered monetary policy implementation. uncertainty about how the economy really works and about the true value of the parameters together with data quality and timeliness ( and, consequently, the robustness of estimates ) is an essential constraint that not only affects the central bank, but also the private sector. there is huge uncertainty about the future behavior of the main domestic variables, especially in relation to ( both goods and factors ) relative price dynamics and that of the various sectors of the economy. another important restriction is given by the difficulty in identifying the nature of shocks, especially external shocks. the world continues to tread today a path of sustained expansion in a context of stability. this pattern of growth is even healthier than