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The Macroeconomics of Government Finance

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This is a critical survey of the literature on the implications of government financial policy for economic activity. The central question is whether the choice of how to finance a given path of government expenditures (i.e., through taxes, nonmonetary debt or money creation) has any real effects. We first present measures of the budget deficit and review economists' views, over the past fifty years, of the burden of public debt, of the neutrality of money, and of fiscal and monetary policies. The earlier tradition and the recent literature differ in methodology, and we then discuss the "microfoundations" approach that dominates contemporary macroeconomics. This is followed by an evaluation of recent analyses, both theoretical and empirical, focusing on (I) the Debt Neutrality hypothesis of Robert Barro, (ii) the effects of the choice between tax- and money-financing of government expenditures, and especially the issues of monetary superneutrality and of the Fisher hypothesis, and (iii) the effects of open market operations.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 888.

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Length: 110 pages
Date of creation: Oct 1988
Publication status: Published in B.M. Friedman and F.H. Hahn, eds., Handbook of Monetary Economics, Vol. 2, Elsevier Sciencem 1990, pp. 889-950
Handle: RePEc:cwl:cwldpp:888
Note: CFP 768.
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