Impacts of Fiscal Actions on Aggregate Income and the Monetarist Controversy: an Empirical Investigation

Abstract

In recognition of the pioneering work on economic planning and in developing national accounts and economic forecasting techniques undertaken by Christopher Saunders, to whom the present study is dedicated, it may not be inappropriate to devote this essay to a further analysis of the Keynesian contention that an increase in government expenditure induces repeated rounds of spending and thereby results in a multiple increase in national income. This contention has been severely challenged by a number of economists who argue that an increase in government spending financed by either taxes and/or borrowing from savings of the general public may reduce private sector spending to an extent that there will be little, if any, net increase in total spending. In other words, increases in government expenditure, which are not accompanied by money creation, cannot do more than induce temporary increases in national income with no net effect over a longer period of time. Or expressed yet differently, government spending financed by either taxation or borrowing from the public is nothing but a resource transfer from the private to the public sector, with little net effect on total spending.

We are indebted to Michael Artis for helpful comments and criticisms.