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RE‐EXAMINING THE EFFECTIVENESS OF STABILISATION POLICY
Author(s) -
MAKIN ANTHONY J.
Publication year - 2007
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/j.1467-8454.2007.00324.x
Subject(s) - economics , ceteris paribus , fiscal policy , monetary economics , exchange rate , government spending , consumption (sociology) , macroeconomics , monetary policy , investment (military) , interest rate , international economics , microeconomics , market economy , social science , sociology , politics , political science , law , welfare
This paper develops an alternative international macroeconomic model for evaluating the effectiveness of fiscal and monetary policy in stabilising national income under fixed and floating exchange rates. It encompasses national output and income, saving, investment, money and capital flows and linkages between the exchange rate, price levels and real interest rates consistent with international parity conditions. It demonstrates that the nature of government spending is pivotal to the effectiveness of fiscal policy, revealing that, ceteris paribus , higher public consumption expenditure contracts national income and depreciates the exchange rate, whereas higher productive public investment spending has opposite effects. The framework also shows that the effectiveness of fiscal and monetary policy as macroeconomic policy instruments is not ultimately dependent on the exchange rate regime.