By J. O. N. Perkins (auth.)
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Extra resources for A General Approach to Macroeconomic Policy
These exchange rate considerations also contribute to explaining the superiority from this point of view of income tax cuts over increases in government outlays; and for all of the countries, and for both fiscal instruments, these exchange rate considerations appear to contribute to explaining why the accommodated forms of fiscal expansion had greater upward effect on prices (for a given real stimulus) than the bond-financed alternative. 10 shows, however, the effects operating through the exchange rate were certainly not the sole channels through which monetary policy was, for most countries, more inflationary than either form of fiscal stimulus.
We consider the following cases. (i) There may be an instrument that has a negligible effect on output but a large upward effect on prices, whereas another instrument has a considerable upward effect on both objectives. 1. 2 Two fiscal instruments with different relative effects on two objectives Effect on Output Prices Tax cuts Government outlays +1 +1 +1 +2 to the policy decisions. ) In this case it is obvious that if one wants to exert downward pressure on prices while raising output, government outlays should be reduced and taxes cut to an appropriate extent until the two objectives are achieved; for in this case a cut in government outlays would not have any (unwanted) downward effect on output.
24 A General Approach to Macroeconomic Policy Whether one is concerned mainly about the five-year average or about the change by the end of the period, one could - on this evidence therefore prescribe some form of monetary restraint with one or more of these two types of fiscal expansion for all these countries except Canada, but for West Germany the tight monetary policy would best be combined with income tax cuts; while for the US the choice would depend partly on whether the main concern is with the end of the period or the average annual level.