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Textbooks and Pure Fiscal Policy: The Neglect of Monetary Basics

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  • Lee C. Spector
  • T. Norman Van Cott

Abstract

Pure fiscal actions—fiscal actions that leave the money supply unchanged—cannot alter aggregate demand without concomitant support from the monetary sector. At the initial level of output, either the demand for money or the quantity of money demanded must change appropriately. Alternatively, since money demand and money velocity are two sides of the same coin (no pun intended), the velocity of money at the initial level of output must change exogenously or endogenously. Otherwise, aggregate demand is unchanged. This unassailable monetary proposition is consistently ignored in current macro-monetary textbook literature. These authors argue that the monetary sector moderates the expansionary/contractionary thrust of pure fiscal actions, whereas arguments grounded in monetary basics would claim that the monetary sector is the source of whatever expansion/contraction occurs. One must go back upwards of thirty years to find textbook authors correctly incorporating monetary basics in their analysis of pure fiscal actions.

Suggested Citation

  • Lee C. Spector & T. Norman Van Cott, 2007. "Textbooks and Pure Fiscal Policy: The Neglect of Monetary Basics," Econ Journal Watch, Econ Journal Watch, vol. 4(1), pages 60-70, January.
  • Handle: RePEc:ejw:journl:v:4:y:2007:i:1:p:60-70
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    References listed on IDEAS

    as
    1. Michael D. Bordo & Anna J. Schwartz, 1987. "Clark Warburton: Pioneer Monetarist," NBER Chapters,in: Money in Historical Perspective, pages 234-254 National Bureau of Economic Research, Inc.
    2. Paul Craig Roberts & T.Norman Van Cott, 1978. "Restrictive Versus Permissive Money: Two Is-Lm Views of Pure Fiscal Action," Public Finance Review, , vol. 6(3), pages 267-276, July.
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    More about this item

    Keywords

    Pure fiscal policy; monetary basics; IS-LM;

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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