Monetary vs. Fiscal Policy Effects: A Review of the Debate

Bennett T. McCallum

NBER Working Paper No. 1556 (Also Reprint No. r0728)
Issued in February 1985
NBER Program(s):Economic Fluctuations and Growth

This paper reviews empirical findings, econometric issues,and theoretical results bearing upon the "monetary vs. fiscal policy" debate that began with the 1963 Friedrnan-Meiselman study.The main substantive conclusions are not very dramatic.The clearest is that an open-market increase in the money stock has a stimulative effect on aggregate demand, a conclusion that in turn implies that a money-financed increase in government expenditures (or reduction in taxes) is more stimulative than it would be if bond financed.This conclusion is based on empirical results obtained from St. Louis-type estimates and large scale economebic models and is supported by theoretical analysis involving both Ricardian and non-Ricardian assumptions. In the case of pure fiscal policy actions -- i.e.,bond-financed tax cutsor bond-financed expenditure increases --theory suggests that the latter should be at least as stimulative as the former and probably to a positive extent; evidence is mixed but not obviously inconsistent with this prediction.With respect to the textbook issue concerning the relative effects of pure monetary and fiscal actions, the evidence seems to support the notion that a sequence of $k open-market purchases, one each period, will be much more stimulative than a single but unreversed $k/period bond-financed increase in expenditures. The importance of this last issue is debatable.

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Document Object Identifier (DOI): 10.3386/w1556


  • McCallum, Bennett T. "Monetary vs. Fiscal Policy Effects: A Review of the Debate." The Monetary vs. Fiscal Policy Debate, edited by R. W. Hafer, pp . 9-29. Totowa, NJ: Rowman & Allanheld, Publishers, 1986.
  • McCallum, Bennett T. "Monetary Policy Without Monetary Aggregates," FRB Saint Louis - Review, 1994, v76(2), 216-218.

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