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On Fiscal Policy and Macroeconomic Stability

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  • James L. Butkiewicz

    (University of Delaware)

Abstract

Fiscal policy is examined in the context of a variable price IS-LM model with a full-employment constraint. Debt-financed fiscal actions are shown to be destabilizing, regardless of the impact of debt finance on aggregate demand. The difficulty arises because growth of the capital stock is required to increase aggregate supply sufficiently to match the increase in demand necessary to balance the budget. However, debt financing raises the interest rate and reduces investment. As the deficit persists, further debt issued and higher interest rates will further dampen investment. Since the necessary increase in investment is not forthcoming, balanced budget equilibrium is never attained .

Suggested Citation

  • James L. Butkiewicz, 1982. "On Fiscal Policy and Macroeconomic Stability," Public Finance Review, , vol. 10(1), pages 39-47, January.
    • Handle: RePEc:sae:pubfin:v:10:y:1982:i:1:p:39-47
    DOI: 10.1177/109114218201000103
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    References listed on IDEAS

    as
    1. Butkiewicz, James L., 1981. "The impact of debt finance on aggregate demand," Journal of Macroeconomics, Elsevier, vol. 3(1), pages 77-90.
    2. repec:bla:kyklos:v:31:y:1978:i:3:p:424-36 is not listed on IDEAS
    3. James R. Barth & James T. Bennett & Manuel H. Johnson & Richard H. Sines, 1980. "The Efficacy of Bond-Financed Fiscal Policy," Public Finance Review, , vol. 8(3), pages 323-344, July.
    4. Christ, Carl F, 1979. "On Fiscal and Monetary Policies and the Government Budget Restraint," American Economic Review, American Economic Association, vol. 69(4), pages 526-538, September.
    5. Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
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    Cited by:

    1. Yasuo Kofuji, 1984. "On the Efficacy of Fiscal Policy and Price Level Changes," Public Finance Review, , vol. 12(2), pages 167-181, April.

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