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Deficit Spending, Expectations, and Fiscal Policy Effectiveness

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  • Cebula, Richard

Abstract

This paper develops a formal theoretical model within which it investigates mathematically the policy implications of adverse business expectations involving deficit financing. It is found that hostility towards deficit financing will always diminish the effectiveness of fiscal policy and render the ultimate impact of fiscal policy indeterminate. Potentially, a fiscal policy aimed at expansion may lead to a perverse final effect: a decline in economic activity. The model constructed allows deficit financing to influence the money supply.

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File URL: http://mpra.ub.uni-muenchen.de/52328/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52328.

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Date of creation: 14 Mar 1972
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Publication status: Published in Public Finance/Finances Publiques 3-4.28(1973): pp. 362-370
Handle: RePEc:pra:mprapa:52328

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Keywords: budget deficit; fiscal policy effectiveness; business expectations;

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  1. Silber, William L, 1970. "Fiscal Policy in IS-LM Analysis: A Correction," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 2(4), pages 461-72, November.
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Cited by:
  1. William Jackson, 1976. "Determinants of long-term bond risk," Working Paper, Federal Reserve Bank of Richmond 76-03, Federal Reserve Bank of Richmond.
  2. Lehment, Harmen, 1983. "The macroeconomic implications of public sector deficits," Kiel Working Papers 168, Kiel Institute for the World Economy.

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