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On the Effectiveness of Monetary Policy and Fiscal Policy

The Levy Economics Institute Working Paper No. 369

25 Pages Posted: 7 Apr 2003  

Philip Arestis

University of Cambridge - Department of Land Economy; Universidad del País Vasco (UPV/EHU)

Malcolm C. Sawyer

Levy Economics Institute; University of Leeds - Leeds University Business School (LUBS); Leeds University Business School (LUBS) - Division of Economics

Date Written: January 2003

Abstract

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.

Keywords: monetary policy, fiscal policy, effectiveness

JEL Classification: E5, E52, E62

Suggested Citation

Arestis, Philip and Sawyer, Malcolm C., On the Effectiveness of Monetary Policy and Fiscal Policy (January 2003). The Levy Economics Institute Working Paper No. 369. Available at SSRN: https://ssrn.com/abstract=382401 or http://dx.doi.org/10.2139/ssrn.382401

Philip Arestis (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Universidad del País Vasco (UPV/EHU)

Barrio Sarriena s/n
Leioa, Bizkaia 48940
Spain

Malcolm C. Sawyer

Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States
845-758-7700 (Phone)
845-758-1149 (Fax)

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom
+44-113-233-4484 (Phone)
+44-113-233-4465 (Fax)

Leeds University Business School (LUBS) - Division of Economics ( email )

Leeds LS2 9JT
United Kingdom

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