Working Paper

New results in support of the fiscal policy ineffectiveness proposition

Abstract: We demonstrate that previous tests of money and fiscal \"policy ineffectiveness\" are likely to be biased because they ignore interaction effects between policies, induced either by direct policy linkages or through the variation of policies in response to common factors. Our analysis takes into account possible interactive effects between monetary and fiscal policy in an attempt to avoid the biases of previous research. Our empirical analysis of U.S. experience supports the short-run ineffectiveness of anticipated and unanticipated fiscal policy, in contrast to other empirical research, but similarly to most other studies rejects the short-run neutrality of anticipated money. However, we find that in the longer run all policies -- either anticipated or unanticipated -- have had neutral effects on U.S. output growth.

Keywords: Fiscal policy; Monetary theory;

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Papers in Applied Economic Theory

Publication Date: 1987

Number: 87-02