IDEAS home Printed from
MyIDEAS: Login to save this book chapter or follow this series

The macroeconomics of government finance

In: Handbook of Monetary Economics

  • Haliassos, Michael
  • Tobin, James

This chapter is a critical survey of literature on the implications of government financial policy for economic activity. The central question is whether the mode of financing of a given path of real government purchases -- by taxes, non-monetary debt issue, or money creation -- has real effects, in particular real effects of macroeconomic consequence.In Section 1, the Introduction, we define the issues with greater detail and precision. We briefly review economists' views, over the past fifty years, of the burden of public debt and the neutrality of money. Section 2 is a review of the 1960s vintage mainstream macroeconomics of fiscal and monetary policies, often called the "neoclassical synthesis". We review its implications for both short-run fluctuations and long-run trends. We include this review because the earlier tradition covers some problems and issues now neglected, because its analyses and results may still have some validity, and because they did set the stage for -- one might say they provoked or inspired -- the recent literature surveyed in Sections 4-6. The earlier tradition and the recent literature differ in methodology, and in Section 3 we discuss the "microfoundations" methodology that dominates contemporary macroeconomics.Sections 4-6 are a selective critical survey of recent contributions, theoretical and empirical, designed to summarize the current state of play on the central issues: Section 4, the debt neutrality hypothesis of Robert Barro; Section 5, the effects of financing government expenditures by printing money rather than taxing, monetary superneutrality, and the "Fisher effect" of inflation on interest rates; Section 6, open market operations, and shifts between bond- and money-financing of government expenditures induced by the adoption of financial policies which are unsustainable over the longer run. In each section we first set forth the neutrality theorems purporting to show the irrelevance of the financing choice. Then we discuss articles elaborating or criticizing the theorems. In each case we conclude with a review and evaluation of some empirical tests. We conclude in Section 7 with short summary remarks.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

in new window

This chapter was published in:
  • B. M. Friedman & F. H. Hahn (ed.), 1990. "Handbook of Monetary Economics," Handbook of Monetary Economics, Elsevier, edition 1, volume 2, number 2, January.
  • This item is provided by Elsevier in its series Handbook of Monetary Economics with number 2-17.
    Handle: RePEc:eee:monchp:2-17
    Contact details of provider: Web page:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:monchp:2-17. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.