A Dynamic Analysis of the Impact of Fiscal Policy on the Money Supply: Note

Abstract

Although a positive (accommodative) fiscal policy-money supply relationship is frequently suggested [3, 5], often because of an hypothesized overriding concern by the Federal Reserve with stabilizing interest rates, the availablAe empirical evidence is mixed.l With the exception of [4], the empirical studies have provided estimates of the impact multipliers for various fiscal variables on alternative monetary variables, but they have not addressed the question of the impact of a sustained change in a fiscal variable upon the money supply over time. In a world in which fiscal variables affect financial and product sector variables with a lag, the examination of only the impact multipliers may give an incomplete and/or misleading picture. Thus, the aim of this paper is to extend the analysis to a dynamic setting in which the impact of the fiscal variables upon the time path of M1 is examined within the context of a small macroeconomic model. In particular, dynamic multipliers for the money supply are derived and analyzed.

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