Government Budget and Fiscal Policy

Kamran Dadkhah ()
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Kamran Dadkhah: Northeastern University

Chapter Chapter 10 in The Evolution of Macroeconomic Theory and Policy, 2009, pp 201-212 from Springer

Abstract: In textbook-Keynesian theory, four features distinguish fiscal policy. First, government expenditures and revenues are independent of each other, and issues of how expenditures are financed or what happens to excess revenues are not addressed. A consideration of government budget constraint, however, shows that either the government has to tax the public or its expenditures have monetary implications. Second, the Keynesian model assumes that the public is passive regarding government debt. Higher debt, however, puts the burden of paying interest and repaying debt on the shoulders of the public, both present and future generations. What is the role of government debt and how does the public react to budget deficit? The Ricardian equivalence is one theory that takes the reaction of the public to future increases in taxes into account albeit it is based on extremely unlikely assumptions. Third, the Keynesian model concentrates on the effect of taxes on demand. However, high rates of taxation are disincentives to work and investment, and thus the supply effects of government budgets need to be considered. Finally, the Keynesian model considers government expenditures and taxes as neutral variables that can be manipulated at will. Budget and fiscal policy, however, are political processes and need to be studied as such. The modern field of political economy has a lot to offer to macroeconomic debates.

Keywords: Interest Rate; Fiscal Policy; Government Expenditure; Money Supply; Budget Deficit (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-540-77008-4_10

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DOI: 10.1007/978-3-540-77008-4_10

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