Fiscal Policy Capital Based Macroeconomics with Idle Resources

Abstract

While Garrison’s model has been mostly used to analyze, theoretically and empirically, business cycles, other potential venues have not been explored. The effects of fiscal policy is one of these applications. In this paper we show how Garrison’s model can be used to analyze the effects of fiscal policy in the presence of idle resources. This yields two important results. Particularly, our application of Garrison’s model shows that even if starting with idle resources fiscal policy manages to reach potential output, the result is imbalances in how resources are allocated in the structure of production of the economy.

Keywords: Capital Based Macroeconomics, Keynesian Macroeconomics, Idle resources, Fiscal policy, Crowding out effect

JEL Classification: B53, E12, E62