The Effects of Macroeconomic Policy with a Disparity in Price Elasticity Between Private‐ and Public‐ Sector Demands

Yasuko Ishiguro

Scottish Journal of Political Economy, 2019, vol. 66, issue 5, 631-648

Abstract: We introduce a disparity in price elasticity between government demand and consumption demand into a simple money‐in‐the‐utility‐function model. This extension demonstrates that the effect of fiscal policies on production may be positive, negative, or neutral depending on the disparity in price elasticity between sectors. Because the effect of an increase in nominal money supply with constant nominal government expenditure is the opposite to that of a fiscal policy, a fiscal policy financed by seigniorage can have positive, negative, or no effects depending on parameter values. Moreover, the effect of simultaneous implementation of expansionary–contractionary policies depends on how they are combined.

Date: 2019
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