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BUDGET BALANCE AND EQUILIBRIUM INCOME: A COMMENT ON THE EFFICACY OF FISCAL AND MONETARY POLICY IN AN OPEN ECONOMY
Author(s) -
Oates Wallace E.
Publication year - 1966
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1966.tb00249.x
Subject(s) - criticism , product (mathematics) , balance (ability) , citation , economics , positive economics , law , political science , psychology , geometry , mathematics , neuroscience
IN A RECENT ISSUE of this Journal, David J. and Attiat F. Ott present an income-generation model which incorporates wealth effects.' The model allows for the asset effects of deficits or surpluses in the government budget, and the authors demonstrate that the inclusion of these effects has striking implications for the impact of monetary and fiscal policy on the equilibrium level of income. Specifically, the authors find that the government deficitspending multiplier is equal to the reciprocal of the marginal propensity to tax (not the marginal propensity to save), and that monetary policy has no effect on the equilibrium level of income. The Ott paper, however, is restricted to the case of a closed economy. In this connection, the authors observe (footnote 9) that ". . . balance-of-payments deficits or surpluses have wealth and monetary effects similar to (though far more complex than) those of government deficits and surpluses, and to have much policy significance the model would have to be generalized to account for these effects as well." The purpose of this note is to reconsider their argument in the context of an open system and to show the interesting implications that "openness" has for the efficacy of fiscal and monetary policy.