Textbooks and Pure Fiscal Policy: The Neglect of Monetary Basics

Lee Spector and T. Norman Van Cott

Econ Journal Watch, 2007, vol. 4, issue 1, 60-70

Abstract: Pure fiscal actions—fiscal actions that leave the money supply unchanged—cannot alter aggregate demand without concomitant support from the monetary sector. At the initial level of output, either the demand for money or the quantity of money demanded must change appropriately. Alternatively, since money demand and money velocity are two sides of the same coin (no pun intended), the velocity of money at the initial level of output must change exogenously or endogenously. Otherwise, aggregate demand is unchanged. This unassailable monetary proposition is consistently ignored in current macro-monetary textbook literature. These authors argue that the monetary sector moderates the expansionary/contractionary thrust of pure fiscal actions, whereas arguments grounded in monetary basics would claim that the monetary sector is the source of whatever expansion/contraction occurs. One must go back upwards of thirty years to find textbook authors correctly incorporating monetary basics in their analysis of pure fiscal actions.

Keywords: Pure fiscal policy; monetary basics; IS-LM (search for similar items in EconPapers)
JEL-codes: A22 E4 E62 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

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