The Rights and Wrongs of Fiscal Policy

Abstract

This paper reveals the rights and wrongs of fiscal policy. It proves that the fiscal multiplier and the Phillips curve do not exist. Then, it employs a Walrasian general equilibrium model to show that the Keynesian model has mistaken product demand for labor demand and therefore has misdiagnosed the unemployment problem. The wrong prescription subsequently led to results opposite to those originally intended. This paper also clarifies the difference between Ricardian equivalence and Barro’s net worth. It points a more constructive way of fiscal policy, but most countries still fail to execute it prudently.

Keywords: Fiscal Policy, Multiplier, Stagflation, Rational Expectation, Ricardian Equivalence

JEL Classification: E62, E12, E24