Fiscal policy was left as the only countercyclical policy option.

They depend on the stabilizing functions that central banks and countercyclical fiscal policy provide.

That is true of both monetary and fiscal policy the two mainstays of modern countercyclical stabilization.

But in a shock prone world, it is a fragile system, because it precludes anything but modest countercyclical policy.

In either case, the US government, hamstrung by already wide deficits, may feel powerless to respond with countercyclical fiscal policy.

Chile s fiscal institutions insure a countercyclical budget.

Moreover, unlike the West, which has used up most of its traditional countercyclical policy ammunition, China has maintained ample scope for fiscal and monetary policy adjustments as circumstances dictate.

Countercyclical fiscal policy had been largely discredited because of the delays involved in implementing fiscal changes and households weak response to temporary tax cuts.

Even with successful countercyclical policy, this recession is likely to last longer and be more damaging than any since the depression of the 1930 s.

That implies a transparent rule of law, and competent, conservative, and countercyclical macroeconomic management.

Without the ability to take timely countercyclical measures, such countries fare poorly when crises hit.

Nevertheless, many were capable of at least some countercyclical measures without destabilizing their public finances.

But some vulnerable countries are still struggling to finance countercyclical investment and expanded social protection services.

Their emphasis has been on countercyclical measures intended to moderate the downturn rather than on restructuring.

But that also means that it will need a more robust mechanism for countercyclical responses to shocks.

The problem for the world economy is that everybody remembered Keynes s lesson about the need for countercyclical policies only when the crisis erupted, after demanding to be left alone with no symmetric policy intervention during the preceding boom.

But a step in the right direction could be taken by partial fiscal centralization with a limited countercyclical mandate.

Perhaps the G 20 will be a venue in which the big emerging market countries remind the US and the UK of the lesson they once knew but have now forgotten what it means to run a countercyclical fiscal policy.

In a sense, what China has been doing seems to me to be the creation of a true Keynesian world more private business and freer price competition at the micro level, and active countercyclical policy intervention at the macro level.

With respect to financial supervision, there has been increasing support since the crisis for countercyclical capital requirements, at least for banks.

In theory, strict in depth monitoring could distinguish genuinely prudent countercyclical responses from profligacy. But in practice it is hard to enforce.

Those developing countries that maintain a stable macroeconomic environment, a countercyclical mindset, and steady progress on governance, education, and infrastructure will thrive.

It would be far better for the German government to take the bull by the horns by defining the principles of a European economic government in such a way that both countercyclical debt policy within the Maastricht framework and the ECB s independence are preserved.

The development and implementation of the Basel III banking standards are essential to introducing countercyclical capital buffers and additional loss absorbency for these institutions.

While developed countries engage in stabilizing countercyclical policies, developing countries would be forced into destabilizing policies, driving away capital when they need it most.

Premature fiscal contraction and or withdrawal of countercyclical measures threaten the public support that is essential to promoting recovery among those hardest hit by the crisis.

Countercyclical spending and tax policy are widely acceptable to experts and taxpayers alike, but deficit spending on wars is known to be a paltry way to stimulate the economy. It does, however, buy political time for US administrations to continue prosecuting ill considered and expensive wars with little domestic scrutiny.

A few countries like Brazil and Chile are reasonably well positioned to engage in countercyclical policies on their own with only a light assist from the IFIs.

In that case, countercyclical policies both fiscal and monetary could eventually be expected to plug the demand hole and get the economy going again, just as Keynesians argue.

These countries all had strong external balance sheets and ample room for fiscal maneuver before the crisis, which allowed them to apply countercyclical policies to combat external shocks.

Spain was not in an enviable position. The rapid deterioration of fiscal position after the crisis made any substantial countercyclical response impossible, while regulatory constraints limited the economy s structural flexibility.

Call them fiscal policy, credit policy, monetary policy, and inflation.

Disarmament policy, too, is preventive policy.

As a result, not only are countercyclical measures needed, but banks capital requirements should vary inversely with the boom and bust fluctuations in the asset markets to which they are heavily exposed.

Such countercyclical capital requirements are likely to be added to the toolkit of macroprudential rules and policies, the use of which has risen as enthusiasm for light touch financial supervision has faded.

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