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Optimum Fiscal Policy when Monetary Policy is Bound by a Rule: Ramsey Redux

In: The Economics of Public Debt

Author

Listed:
  • Edmund S. Phelps

    (Columbia University)

  • Kumaraswamy Velupillai

    (Aalborg University Center)

Abstract

The Keynesian revolution, whatever Keynes’s own views, fostered the precept that fiscal policy — the determination of government spending and taxation — should be put at the service of employment stabilisation. This calls for ‘functional finance’, as its early proponent Abba Lerner (1944) dubbed it, and it became one of the essential tenets of paleo-Keynesian thought. Make the budget stimulative when the economy shows slack, said those Keynesians favouring automatic over-discretionary stabilisation. Make the budget stimulative when the economy shows signs of incipient slack in order to avert that slack, said those advocating discretionary stabilisation. On either view monetary policy was to play the role of keeping real interest rates low in order to hasten the day of full investment, to use Alvin Hansen’s (1960) term for the golden rule state.

Suggested Citation

  • Edmund S. Phelps & Kumaraswamy Velupillai, 1988. "Optimum Fiscal Policy when Monetary Policy is Bound by a Rule: Ramsey Redux," International Economic Association Series, in: Kenneth J. Arrow & Michael J. Boskin (ed.), The Economics of Public Debt, chapter 4, pages 116-130, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-349-19459-9_4
    DOI: 10.1007/978-1-349-19459-9_4
    as

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