A Brief Note on Economic Policy Effectiveness

Cebula, Richard (1974): A Brief Note on Economic Policy Effectiveness. Published in: Southern Economic Journal , Vol. 43, No. 2 (28 October 1976): pp. 1174-1176.

Abstract

This study develops a theoretical model for investigating the impacts of households who are target savers and firms that are growth maximizing on the effectiveness of standard monetary and fiscal policies. These two circumstances together generate a dynamic in which the condition for IS-LM stability is mathematically reversed, i.e., the slope of the IS curve must exceed that of the LM curve. Under these conditions, an expansionary fiscal policy raises both the interest rate and the GDP level, as might be expected; however, an expansionary monetary policy leads to a lower GDP level, which is an unexpected outcome.

• Item Type: MPRA Paper
• Language: English
• Keywords: IS-LM stability; fiscal multiplier; monetary multiplier; public policy
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm

References

1. Musgrave, Richard. The Theory of Public Finance. New York: McGraw-Hill, 1959.

2. Weber, Warren. "The Effect of Interest Rates on Aggregate Consumption," American Economic Review, September, 1970, 591-620.

3. Yarrow, George. "Growth Maximization and the Firm's Investment Function," Southern Economic Journal, April, 1975, 580-592.