Does the St. Louis Equation Now Believe in Fiscal Policy?

Keith M. Carlson

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Monetary Policy and Economic Impact Fiscal Policies and Political Economy Fiscal Policy and Economic Growth

Abstract

The “St. Louis equation” was developed in 1968 in an article in this Review by Leonall Andersen and Jerry Jordan. The St. Louis equation is an estimated relationship (using the Almon procedure) between changes in total spending (GNP) and changes in the money supply and high-employment Federal expenditures. The focus of the Andersen-Jordan article was on the relative impact of monetary and fiscal actions. They rejected the propositions that the response of economic activity to fiscal actions relative to monetary actions was (1) larger, (2) more predictable, and (3) faster. In fact, their results suggested that the overall effect of fiscal actions was relatively small and not statistically significant. It was this result that generated considerable controversy among members of the economics profession.

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