The use of fiscal policy for short-run stabilization purposes. For this reason, the main treatment of fiscal policy in connection with the effects of the deficit and the build up of the public debt on the prospects for long-run growth. For the same reason, has been devoted to monetary policy and some of the new problems that have emerged in conducting it. The stabilization aspects of fiscal policy. While fiscal policy appears to be suspended, at least temporarily, as a stabilization tool in the United States, there are three good reasons to review the limitations of fiscal policy for stabilization purposes. First, to understand history we need to know if it was desirable to use fiscal policy for stabilization purposes in the years prior to the budget stalemate of the 19810s and accordingly, if it would be desirable to use fiscal policy in the future after the stalemate is resolved. Second we noted in this chapter and the last that structural changes in the economy, especially financially financial deregulation and flexible exchange rates, may make the lags of monetary policy longer than before, possibly tilting the balance toward fiscal policy. Third fiscal policy for stabilization purposes is of continued interest in other nations that have not experienced a budget debate similar to that in the United States.
In the IS-LM model of the conduct of fiscal policy is a simple matter. If real output is too low, then the government can increase spending or cut taxes. Since the IS-LM model has no time dimension, there is no apparent difference between monetary and fiscal policy in the ability to stimulate output (unless the IS or LM curve has an extreme horizontal or vertical slope). But in reality there are important limitations on the use of fiscal policy for stabilization purposes. The first is the existence of lags, which is also a problem in the use of monetary policy. The main difference is that the legislative lag of fiscal policy is longer, although the effectiveness lag may be shorter. The other problems are more specific to fiscal policy. There are good reasons to suspect that temporary changes in tax rates may have little impact on spending. Finally, changes in expenditures may be inefficient if the ...
The monetary policy is described.