The financial crisis turned into a broader macroeconomic crisis in the fall of 2008. The world economy has hit a wall since then, with growth plunging in all the major advanced and emerging economies.
Monetary policy acted as a first line of defense against the crisis but conventional measures appear to have reached their limits in many countries. Policy interest rates in many countries--including the U.S., U.K. and Japan--are now close to the zero nominal interest rate floor. Moreover, the implosion of financial systems in many economies has rendered monetary transmission mechanisms far less effective.
Thus, fiscal policy has become essential to kick-start the global recovery or, at a minimum, to prevent global Gross Domestic Product (GDP) from declining further. At the November 2008 G-20 Summit in Washington, DC, the leaders of the G-20 countries promised to "use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability." How well have countries been doing on this promise?