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Searching for Keynes

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Abstract

Since its publication over 60 years ago, Keynes' General Theory of Employment, Interest and Prices (1936) has substantially influenced both macroeconomic theory and popular opinion about what governments can and should do. However, the extent to which counter-cyclical stabilization has actually been attempted remains an open question. Investigation of this issue requires the construction of a counterfactual describing what the relationship between fiscal policy and transitory macroeconomic shocks would have been like 'after Keynes', if Keynesianism stabilization was not implemented. This counterfactual must allow for the possibility that after Keynes, as well as before, political pressure exerted by voters who find themselves in adverse circumstances may have led to the adoption of fiscal policies that look Keynesian, but are not. We estimate such a counterfactual for Canada using consistent budgetary data for the period from 1870 to 1995 constructed by Irwin Gillespie (and updated by the authors), and use it to test for the presence of Keynesian elements in the fiscal policy choices of the Government of Canada. The estimating equations are based on an intertemporal probabilistic voting framework in which parties compete for support from two types of voters; those who are liquidity constrained and those who are not. The Canadian case is of particular interest: the White Paper on Employment and Income in 1945 signalled the acceptance of Keynesianism in senior policy circles; one of Keynes’ students, Robert Bryce, who dates the first Keynesian budget from 1939, played an important role for many years in the Department of Finance; and the fixed exchange rate policy conducted from 1962 to 1970 created an environment conducive to fiscal policy actions.

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File URL: http://www1.carleton.ca/economics/research/working-papers/carleton-economic-papers-cep/1991-2000/
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Bibliographic Info

Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 99-06.

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Length: 39 pages
Date of creation: Mar 1999
Date of revision: Jun 2008
Publication status: Published: – revised version: Searching for Keynesianism, European Journal of Political Economy, Vol. 24, No. 2 (June 2008), pp. 294–316
Handle: RePEc:car:carecp:99-06

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Keywords: public economics; public finance; public choice; Keynesianism; liquidity constraints; stabilization; probabilistic voting; permanent size of government;

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Cited by:
  1. J. Stephen Ferris & Soo-Bin Park & Stanley L. Winer, 2005. "Political Competition and Convergence to Fundamentals: With Application to the Politcal Business Cycle and the Size of the Public Sector," Carleton Economic Papers 05-09, Carleton University, Department of Economics.
  2. Winer, Stanley L. & Ferris, J. Stephen, 2008. "Searching for Keynesianism," European Journal of Political Economy, Elsevier, vol. 24(2), pages 294-316, June.
  3. J. Stephen Ferris & Stanley L. Winer, 2006. "Politics, political competition and the political budget cycle in Canada, 1870 - 2000: a search across alternative fiscal instruments," Carleton Economic Papers 06-05, Carleton University, Department of Economics.
  4. Stanley L. Winer & J Stephen Ferris, 2003. "Searching for Keynes: An Essay on the Political Economy of Fiscal Policy, with Application to Canada, 1870-2000 - revised version," CESifo Working Paper Series 1016, CESifo Group Munich.

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