Effectiveness of the fiscal policy
The debate between keynesians and monetarists on the effectiveness of fiscal policy has been going for quite a long time, and all efforts to resolve it have met with little success. While everyone would agree that the controversy can only be resolved on empirical grounds, there is no agreement among the two schools as to what constitutes an appropriate test of their respective theories. In this paper, a small macroeconomic model has been developed which incorporates the major elements of the keynesian-monetarist debate and which can produce either keynesian or monetarist results, depending upon the values taken by the particular sets of coefficients. The model has not been estimated and is not designed, therefore, to evaluate the actual impact of fiscal policy measures in Canada. Rather the coefficients of the model have been either borrowed from existing models or set a priori, in order to identify those aspects or parameters of the model which are most important in determining the effectiveness of fiscal policy. Simulations performed with the model indicate a number of factors that are critical in producing either Keynesian or monetarist results. These are: 1) the expected—real—interest elasticity of private real investment; 2) the substitutability between government bonds, money and other assets; 3) the specification of wage behaviour and the degree of influence of price expectations; 4) the sensitivity of nominal interest rates to changes in the inflationary expectations; 5) the extent to which future taxes are anticipated by consumers and 6) the mechanism for determining the price of exports.
- ANDERSEN, L.C. et K.M. CARLSON, "A Monetarist Model for Economic Stablization", Federal Reserve Bank of St. Louis Review, 52, n° 4, avril 1970, pp. 7-25.
- ANDERSEN, L.C. et J.L. JORDAN, "Monetary and Fiscal Actions: A Test of Their Relative Importance in Economic Stabilization", Federal Reserve Bank of St. Louis, novembre 1968, pp. 11-23.
- BLINDER, A.S. et R.M. SOLOW, "Does Fiscal Policy Matter?", Journal of Public Economics, novembre 1973, pp. 319-337.
- BRUNNER, K. et A. MELTZER, "Friedman's Monetary Theory" dans R.J. Gordon (éd.), Milton Friedman's Monetary Framework, University of Chicago Press, Chicago, 1977, pp. 63-76.
- CARLSON, K.M., "Monetary and Fiscal Actions in Macroeconomic Models", Federal Reserve Bank of St. Louis Review, 60, n° 1, janvier 1974, pp. 8-18.
- CARLSON, K.M., "Does the St. Louis Equation Now Believe in Fiscal Policy?", Federal Reserve Bank of St. Louis Review, 60, n° 2, février 1978, pp. 13-19.
- CARLSON, K.M. et R.W. SPENCER, "Crowding Out and Its Critics", Federal Reserve Bank of St. Louis Review, 57, n° 12, décembre 1975, pp. 2-17.
- CEPULA, R.J., "Deficits Spending, Expectations and Fiscal Policy Effectiveness", Public Finance, 3, n° 4, 1973, pp. 362-370.
- COHEN, D. et J.S. McMENAMIN, "The Role of Fiscal Policy in a Financially Disaggregated Macroeconomic Model", Journal of Money, Credit and Banking, 10, n° 3, août 1978, pp. 322-336.
- DUGUAY, P., « Une analyse du modèle à forme réduite et son application au Canada », Banque du Canada, Rapport technique n° 15, 1979.
- FRIEDMAN, B., "Even the St. Louis Model Now Believes in Fiscal Policy", Journal of Money, Credit and Banking, 9, n° 2, mai 1977, pp. 365-367.
- FRIEDMAN, B., "Crowding-Out or Crowding-In: Economic Consequences of Financing Government Deficits", Brookings Papers on Economic Activity, n° 3, 1978.
- GOLDFELD, S.M. et A.S. BLINDER, "Some Implications of Endogenous Stabilization Policies", Brookings Papers on Economic Activity, n° 3, 1972.
- GORDON, R.J., "Perspective on Monetarism" dans J.L. Stein (éd.), Monetarism North-Holland, New York, 1976, pp. 52-66.
- GRAMLICH, E., "The Usefulness of Monetary and Fiscal Policy as Discretionary Stabilization Tools", Journal of Money, Credit and Banking, 3, n° 2, mai 1971, pp. 506-532
- HELLIWELL, J.F., T. MAXWELL et A.E.L. WASLANDER, "Comparing the Dynamics of Canadian Macromodels", Revue canadienne d’Économique, 12, n° 2, mai 1979, pp. 181-194.
- HENDERSHOTT, P.H., "A Tax Cut in a Multiple Security Model - Crowding-Out, Pulling-In and the Term Structure of Interest Rates", Journal of Finance, 31, n° 4, septembre 1976, pp. 1185-1200.
- MINISTÈRE DES FINANCES, "Comparative Responses of Canadian Econometric Models to Fiscal Policy, Monetary Policy and Exchange Rate Shocks", Division de la politique fiscale, juin 1979.
- MODIGLIANI, F. et A. ANDO, "Impacts of Fiscal Actions on Aggregate Income and the Monetarist Controversy: Theory and Evidence" dans J.L. Stein, Monetarism, 1976, pp. 17-42.
- PURVIS, D.D., "Monetarism. A Review", Discussion Paper, Queen's University, 1978.
- RASCHE, R., "A Comparative Static Analysis of Some Monetarist Propositions", Federal Reserve Bank of St. Louis Review, 55, n° 12, décembre 1973, pp. 15-23.
- SHEIKH, M.A., "Medium-Term Projections of the Canadian Economy Using Reduced-Form Monetarist Models", Division de la politique fiscale, Ministère des Finances, novembre 1979.
- SILBER, W.L., "Fiscal Policy in IS-LM Analysis - A Correction", Journal of Money, Credit and Banking, 2, n° 3, novembre 1970, pp. 461-472.
- STEIN, J.L., "Inside the monetarist black box" dans J.L. Stein (éd.), Monetarism, 1976, pp. 183-232.
- STEVENS, N.A., "Government Debt Financing - Its Effects in View of Tax Discounting", Federal Reserve Bank of St. Louis Review, 61, n° 7, juillet 1979, pp. 11-19.
- TOBIN, J. et W. BUITER, "Long Run Effects of Fiscal and Monetary Policy on Aggregate Demand " dans J.L. Stein, Monetarism, 1976.