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BALANCED BUDGETS: ECONOMIC NIRVANA OR FISCAL CHAOS?
Author(s) -
DAY RICHARD H.
Publication year - 1996
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.1996.tb00610.x
Subject(s) - economics , monetary economics , balanced budget , fiscal policy , tax revenue , revenue , unemployment , aggregate demand , monetary policy , macroeconomics , government budget , general equilibrium theory , public finance , finance , politics , political science , law
This paper investigates the effect of a pay‐as‐you‐go, balanced budget policy on macroeconomic performance. It uses a simple model of the aggregate demand for money and goods, with temporary monetary equilibrium and quantity adjustments on goods markets. Within this framework, if the monetary/real interaction is strong enough, a balanced budget with sufficiently high tax rates (≡ sufficiently high government expenditures) is consistent with typical bounded fluctuations around a relatively high income, low unemployment equilibrium. Lower tax rates (≡ lower government expenditures) can trigger a sharp decline in revenues, expenditures, employment, and output.