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Deficit Spending, Expectations, and Fiscal Policy Effectiveness


  • Cebula, Richard


This paper develops a formal theoretical model within which it investigates mathematically the policy implications of adverse business expectations involving deficit financing. It is found that hostility towards deficit financing will always diminish the effectiveness of fiscal policy and render the ultimate impact of fiscal policy indeterminate. Potentially, a fiscal policy aimed at expansion may lead to a perverse final effect: a decline in economic activity. The model constructed allows deficit financing to influence the money supply.

Suggested Citation

  • Cebula, Richard, 1972. "Deficit Spending, Expectations, and Fiscal Policy Effectiveness," MPRA Paper 52328, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:52328

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    References listed on IDEAS

    1. Silber, William L, 1970. "Fiscal Policy in IS-LM Analysis: A Correction," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(4), pages 461-472, November.
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    Cited by:

    1. William D. Jackson, 1976. "Determinants of long-term bond risk," Working Paper 76-03, Federal Reserve Bank of Richmond.
    2. Lehment, Harmen, 1983. "The macroeconomic implications of public sector deficits," Kiel Working Papers 168, Kiel Institute for the World Economy (IfW).

    More about this item


    budget deficit; fiscal policy effectiveness; business expectations;

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H69 - Public Economics - - National Budget, Deficit, and Debt - - - Other


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