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Real government size, automatic feedback rules and the measured effectiveness of fiscal policy

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  • J. Stephen Ferris

Abstract

This paper argues that as intervention, fiscal policy means more than simply any change in government spending and this requires of fiscal analysis a measure that separates the allocative from the counter-cyclical activities of government. Defining intervention as an optimal policy rule that responds automatically to privately unanticipated variations in output, a general equilibrium model is built to separate the supply side effects of desired changes in the size of government from demand side interventions designed to stimulate aggregate demand. The model is tested using the results of a public choice investigation of the real size of government (Ferris and West, 1996). That exercise produces a measure of desired size and, through its residual, an implicit measure of intervention. The paper tests the prediction that increases in desired size increase aggregate supply and that ex post measures of fiscal intervention can be recovered and tested for their effect on aggregate output. The test uses CITIBASE US annual data from 1959 through 1989.

Suggested Citation

  • J. Stephen Ferris, 1998. "Real government size, automatic feedback rules and the measured effectiveness of fiscal policy," Applied Economics, Taylor & Francis Journals, vol. 30(3), pages 365-373.
    • Handle: RePEc:taf:applec:v:30:y:1998:i:3:p:365-373
    DOI: 10.1080/000368498325886
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    References listed on IDEAS

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    3. Wittman, Donald, 1989. "Why Democracies Produce Efficient Results," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1395-1424, December.
    4. Aschauer, David Alan, 1988. "The Equilibrium Approach to Fiscal Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 41-62, February.
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    6. McCallum, B. T. & Whitaker, J. K., 1979. "The effectiveness of fiscal feedback rules and automatic stabilizers under rational expectations," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 171-186, April.
    7. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    8. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
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