Macroeconomic Dynamics

Table of Contents - April 2012 - Volume 16, Supplement S1 (Nonlinear Dynamics in Equilibrium Models)  

Articles

DOES FISCAL POLICY MATTER? BLINDER AND SOLOW REVISITED

Roger E. A. Farmera1 c1 and Dmitry Plotnikova1

a1 University of California, Los Angeles

Abstract

This paper uses the old Keynesian representative agent model developed by Roger E. A. Farmer [Expectations, Employment and Prices. New York: Oxford University Press (2010)] to answer two questions: (1) Do increased government purchases crowd out private consumption? (2) Do increased government purchases reduce unemployment? Farmer compared permanent tax-financed expenditure paths and showed that the answer to (1) was yes and the answer to (2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in Farmer. However, in contrast to Farmer's experiment, we find that a temporary increase in government purchases can also reduce unemployment.

Keywords:

  • Unemployment;
  • Fiscal Policy;
  • Crowding Out

Correspondence:

c1 Address correspondence to: Roger E. A. Farmer, Department of Economics, University of California, Los Angeles, 8283 Bunche Hall, Los Angeles, CA 90095-1477, USA; e-mail: rfarmer@econ.ucla.edu.

Footnotes

We wish to thank the National Science Foundation for funding this research under Grant 0720839. We would also like to thank a referee of this journal for his/her helpful comments. The title of the paper is borrowed from Blinder and Solow (1973), who asked the same question nearly 40 years ago in the context of the IS-LM model.