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A Test of Two Open-Economy Theories: Oil Price Rise and the Netherlands

Author

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  • Kavous Ardalan

    (Marist College)

Abstract

Two major open-economy theories are the Keynesian and Monetarist theories. The goal of the study is to empirically discriminate between the two theories. Keynesian and monetarist views about the homeostatic mechanism are fundamentally different and provide a basis for constructing discriminatory empirical tests. The Keynesian theory holds that there is no, or only a very weak, homeostatic mechanism and, in the absence of government intervention, real income tends to remain below the level of full employment. In the monetary interpretation, the homeostatic mechanism is strong, and real income can be treated as though it were exogenous. This study examines the response of the Netherlands to the sharp increase in oil prices in late 1973. The experience of the Netherlands, as an oil-importing country, supports the Keynesian view.

Suggested Citation

  • Kavous Ardalan, 2017. "A Test of Two Open-Economy Theories: Oil Price Rise and the Netherlands," Proceedings of International Academic Conferences 5407612, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iacpro:5407612
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    File URL: https://iises.net/proceedings/32nd-international-academic-conference-geneva/table-of-content/detail?cid=54&iid=004&rid=7612
    File Function: First version, 2017
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    More about this item

    Keywords

    Open Economy; Keynesian; Monetarist; Controversy; Oil Price Rise; Macroeconomics;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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