Premium
Uncertainty and the Effectiveness of Monetary and Fiscal Policies
Author(s) -
Choi E. Kwan,
Beladi Hamid
Publication year - 2000
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00214
Subject(s) - economics , aggregate supply , aggregate demand , fiscal policy , unitary state , production (economics) , monetary policy , microeconomics , risk aversion (psychology) , aggregate (composite) , monetary economics , systematic risk , macroeconomics , econometrics , financial economics , expected utility hypothesis , materials science , political science , law , composite material
This paper integrates the decision making of a firm facing production uncertainty into the theory of aggregate supply. This integration has two important policy implications. First, if the aggregate demand is not unitary price elastic, the presence of uncertainty reduces the aggregate supply, whether producers are risk neutral or risk averse. Second, given the assumption of decreasing absolute risk aversion an increase in interest rate reduces the aggregate supply, and hence the presence of production uncertainty reduces the effectiveness of fiscal policy whereas it increases that of monetary policy for affecting income.