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Fiscal Policy, Interest Sensitive Aggregate Supply and the Costs of Disinflation

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  • Myatt, Anthony E
  • Scarth, William M

Abstract

Many countries have tried to cushion the short-run effect of monetary disinflation on unemployment by keeping fiscal policy expansionary. This paper studies whether this use of fiscal policy is made ineffective by aggre gate supply-side effects of interest rates. Except for the existence of these supply-side effects, the model is standard: rational expectations, sticky wages in the short-run, and an exogenous natural rate in full equilibrium. The analysis is combined with empirical evidence to demonstrate that the perverse effects that can follow from fiscal policy are significant for macroeconomic policy. Copyright 1987 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Myatt, Anthony E & Scarth, William M, 1987. "Fiscal Policy, Interest Sensitive Aggregate Supply and the Costs of Disinflation," The Manchester School of Economic & Social Studies, University of Manchester, vol. 55(2), pages 144-157, June.
    • Handle: RePEc:bla:manch2:v:55:y:1987:i:2:p:144-57
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    Cited by:

    1. Myatt, Anthony & Scarth, William M., 2003. "Is policy perversity consistent with Keynesian business cycles?," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 351-365, September.
    2. Myatt, Anthony & Scarth, William M., 1995. "Can fiscal spending be contractionary when interest rates have supply-side effects?," Journal of Macroeconomics, Elsevier, vol. 17(2), pages 289-301.

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