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The Macroeconomics of Government Finance

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Abstract

This is a critical survey of the literature on the implications of government financial policy for economic activity. The central question is whether the choice of how to finance a given path of government expenditures (i.e., through taxes, nonmonetary debt or money creation) has any real effects. We first present measures of the budget deficit and review economists' views, over the past fifty years, of the burden of public debt, of the neutrality of money, and of fiscal and monetary policies. The earlier tradition and the recent literature differ in methodology, and we then discuss the "microfoundations" approach that dominates contemporary macroeconomics. This is followed by an evaluation of recent analyses, both theoretical and empirical, focusing on (I) the Debt Neutrality hypothesis of Robert Barro, (ii) the effects of the choice between tax- and money-financing of government expenditures, and especially the issues of monetary superneutrality and of the Fisher hypothesis, and (iii) the effects of open market operations.

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File URL: http://cowles.econ.yale.edu/P/cd/d08b/d0888.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 888.

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Length: 110 pages
Date of creation: Oct 1988
Date of revision:
Publication status: Published in B.M. Friedman and F.H. Hahn, eds., Handbook of Monetary Economics, Vol. 2, Elsevier Sciencem 1990, pp. 889-950
Handle: RePEc:cwl:cwldpp:888

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Keywords: Government spending; fiscal policy; government policy; budget deficit;

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Cited by:
  1. Azizi, Karim & Canry, Nicolas & Chatelain, Jean-Bernard & Tinel, Bruno, 2013. "Government Solvency, Austerity and Fiscal Consolidation in the OECD: A Keynesian Appraisal of Transversality and No Ponzi Game Conditions," MPRA Paper 46519, University Library of Munich, Germany.
  2. Gabor Oblath & Akos Valentinyi, 1993. "Macroeconomic Policy, Liberalization and Transition: Hungary's Case," CASE Network Studies and Analyses 0008, CASE-Center for Social and Economic Research.
  3. Jamee K. Moudud & Ajit Zacharias, 1999. "The Social Wage, Welfare Policy, and the Phases of Capital Accumulation," Economics Working Paper Archive wp_291, Levy Economics Institute.
  4. Koustas, Z., Serletis, A., 1998. "On the Fisher Effect," Papers 98-09, Calgary - Department of Economics.
  5. Thorbecke, Willem, 2002. "Budget deficits, inflation risk, and asset prices," Journal of International Money and Finance, Elsevier, vol. 21(4), pages 539-553, August.
  6. Rudi Dornbusch, 1996. "Debt and Monetary Policy: The Policy Issues," NBER Working Papers 5573, National Bureau of Economic Research, Inc.
  7. D'Ecclesia, Rita L. & Zenios, Stavros A., 2005. "Estimation of asset demands by heterogeneous agents," European Journal of Operational Research, Elsevier, vol. 161(2), pages 386-398, March.
  8. Alberto Bagnai, 2004. "Keynesian And Neoclassical Fiscal Sustainability Indicators, With Applications To Emu Member Countries," Public Economics 0411005, EconWPA.
  9. Jamee K. Moudud & Ajit Zacharias, 2000. "Finance in a Classical and Harrodian Cyclical Growth Model," Macroeconomics 0004037, EconWPA.
  10. Zeinab Partow, . "Una revisión de la Literatura sobre los Costos de la Inflación," Borradores de Economia 032, Banco de la Republica de Colombia.

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