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Searching for Keynes

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Abstract

Since its publication over 60 years ago, Keynes' General Theory of Employment, Interest and Prices (1936) has substantially influenced both macroeconomic theory and popular opinion about what governments can and should do. However, the extent to which counter-cyclical stabilization has actually been attempted remains an open question. Investigation of this issue requires the construction of a counterfactual describing what the relationship between fiscal policy and transitory macroeconomic shocks would have been like 'after Keynes', if Keynesianism stabilization was not implemented. This counterfactual must allow for the possibility that after Keynes, as well as before, political pressure exerted by voters who find themselves in adverse circumstances may have led to the adoption of fiscal policies that look Keynesian, but are not. We estimate such a counterfactual for Canada using consistent budgetary data for the period from 1870 to 1995 constructed by Irwin Gillespie (and updated by the authors), and use it to test for the presence of Keynesian elements in the fiscal policy choices of the Government of Canada. The estimating equations are based on an intertemporal probabilistic voting framework in which parties compete for support from two types of voters; those who are liquidity constrained and those who are not. The Canadian case is of particular interest: the White Paper on Employment and Income in 1945 signalled the acceptance of Keynesianism in senior policy circles; one of Keynes’ students, Robert Bryce, who dates the first Keynesian budget from 1939, played an important role for many years in the Department of Finance; and the fixed exchange rate policy conducted from 1962 to 1970 created an environment conducive to fiscal policy actions.

Suggested Citation

  • J.Stephen Ferris & Stanley L. Winer, 1999. "Searching for Keynes," Carleton Economic Papers 99-06, Carleton University, Department of Economics, revised Jun 2008.
  • Handle: RePEc:car:carecp:99-06
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    File URL: http://www.carleton.ca/economics/research/working-papers/carleton-economic-papers-cep/1991-2000/
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    Cited by:

    1. J. Stephen Ferris & Marcel-Cristian Voia, 2014. "Does Aggregate Government Size Effect Private Economic Performance in Canada?," Carleton Economic Papers 14-13, Carleton University, Department of Economics.
    2. J. Stephen Ferris & Stanley L. Winer, 2006. "Politics, political competition and the political budget cycle in Canada, 1870 - 2000: a search across alternative fiscal instruments," Carleton Economic Papers 06-05, Carleton University, Department of Economics.
    3. Ferris, J. Stephen & Voia, Marcel C., 2015. "The effect of federal government size on private economic performance in Canada: 1870–2011," Economic Modelling, Elsevier, vol. 49(C), pages 172-185.
    4. J. Stephen Ferris & Soo-Bin Park & Stanley L. Winer, 2005. "Political Competition and Convergence to Fundamentals: With Application to the Politcal Business Cycle and the Size of the Public Sector," Carleton Economic Papers 05-09, Carleton University, Department of Economics.
    5. Winer, Stanley L. & Ferris, J. Stephen, 2008. "Searching for Keynesianism," European Journal of Political Economy, Elsevier, vol. 24(2), pages 294-316, June.
    6. Stanley L. Winer & J Stephen Ferris, 2003. "Searching for Keynes: An Essay on the Political Economy of Fiscal Policy, with Application to Canada, 1870-2000 - revised version," CESifo Working Paper Series 1016, CESifo Group Munich.

    More about this item

    Keywords

    public economics; public finance; public choice; Keynesianism; liquidity constraints; stabilization; probabilistic voting; permanent size of government;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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