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Re‐Examining The Effectiveness Of Stabilisation Policy

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  • ANTHONY J. MAKIN

Abstract

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.

Suggested Citation

  • Anthony J. Makin, 2007. "Re‐Examining The Effectiveness Of Stabilisation Policy," Australian Economic Papers, Wiley Blackwell, vol. 46(4), pages 348-359, December.
  • Handle: RePEc:bla:ausecp:v:46:y:2007:i:4:p:348-359
    DOI: 10.1111/j.1467-8454.2007.00324.x
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    References listed on IDEAS

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    1. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
    3. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
    4. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    5. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    6. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 421-445.
    7. Anthony J. Makin, 2004. "The Current Account, Fiscal Policy, and Medium‐Run Income Determination," Contemporary Economic Policy, Western Economic Association International, vol. 22(3), pages 309-317, July.
    8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    9. Taylor, Mark P, 1999. "Real Interest Rates and Macroeconomic Activity," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 15(2), pages 95-113, Summer.
    10. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
    11. A. J. Makin, 2003. "Global Finance and the Macroeconomy," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-50403-5, December.
    12. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 149-169, Spring.
    13. Tony Makin, 2006. "Has Foreign Capital Made us Richer?," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 13(3), pages 225-237.
    14. Frenkel, Jacob A & Razin, Assaf, 1987. "Fiscal Policies and the World Economy; An Intertemporal Approach (Cambridge, Mass.: MIT Press, 1987)," MPRA Paper 20438, University Library of Munich, Germany.
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    Cited by:

    1. Ross Guest & Anthony J. Makin, 2011. "In the Long Run, the Multiplier is Dead: Lessons from a Simulation," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 18(1), pages 13-22.
    2. Brittle, Shane, 2009. "Ricardian Equivalence and the Efficacy of Fiscal Policy in Australia," Economics Working Papers wp09-10, School of Economics, University of Wollongong, NSW, Australia.
    3. Tony Makin, 2012. "The Fiscal Policy Response to the Global Financial Crisis: A Critique," Chapters, in: Mohamed Ariff & John H. Farrar & Ahmed M. Khalid (ed.), Regulatory Failure and the Global Financial Crisis, chapter 6, Edward Elgar Publishing.

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