IDEAS home Printed from
   My bibliography  Save this paper

On the Effectiveness of Monetary Policy and Fiscal Policy


  • Philip Arestis
  • Malcolm Sawyer


Within the framework of macroeconomic policy and theory over the past twenty years or so, a major shift has occurred regarding the relative importance given of monetary policy versus fiscal policy. The former has gained considerably in stature, while the latter is rarely mentioned. Further, monetary policy no longer focuses on attempts to control some monetary aggregate, as it did in the first half of the 1980s, but instead focuses on the setting of interest rates as the key policy instrument. There has also been a general shift toward the adoption of inflation targets and the use of monetary policy to target inflation. This paper considers the significance of this shift in the emphasis of monetary policy, questions its effectiveness, and explores the role of fiscal policy. We examine these subjects from the point of view of the “new consensus” in monetary economics and suggest that its analysis is rather limited. When the analysis is broadened to embrace empirical issues and evidence, the conclusion clearly emerges that monetary policy is relatively impotent. We argue that fiscal policy (under specified conditions) remains a powerful tool for macroeconomic policy, particularly under current economic conditions.

Suggested Citation

  • Philip Arestis & Malcolm Sawyer, 2003. "On the Effectiveness of Monetary Policy and Fiscal Policy," Economics Working Paper Archive wp_369, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_369

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Malcolm Sawyer, 2011. "Re-thinking Macroeconomic Policies," Chapters,in: Credit, Money and Macroeconomic Policy, chapter 13 Edward Elgar Publishing.
    2. Asensio, Angel & Charles, Sébastien & Lang, Dany & Le Heron, Edwin, 2011. "Les développements récents de la macroéconomie post-keynésienne," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 10.
    3. Julio Lopez-Gallardo & Luis Reyes-Ortiz, 2011. "Effective Demand in the Recent Evolution of the US Economy," Economics Working Paper Archive wp_673, Levy Economics Institute.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_369. 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: (Elizabeth Dunn). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.