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2013•Review of Political EconomyRequires access

Keynesian, Classical and New Keynesian Approaches to Fiscal Policy: Comparison and Critique

Thomas I. Palley

Open publisher page 25 citations

Abstract

The short-run macroeconomic effectiveness of fiscal policy depends primarily on the effect of policy on aggregate demand (AD) and the effect of AD on output. This paper examines how macroeconomic perspectives (Keynesian, Post Keynesian, monetarist, classical, new classical, and new Keynesian) describe the effect of AD on output, thereby making or denying space for fiscal policy to impact output. The neo-Ricardian hypothesis (NRH) concerns the effect of bond-financed deficits on AD. The NRH turns on the microeconomic behavior of households and can therefore hold in principle in both classical and Keynesian models. Recent new Keynesian arguments about fiscal policy being effective at the zero lower bound represent another capital market imperfection critique of the NRH.

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The short-run macroeconomic effectiveness of fiscal policy depends primarily on the effect of policy on aggregate demand (AD) and the effect of AD on output. This paper examines how macroeconomic perspectives (Keynesian, Post Keynesian, monetarist, classical, new classical, and new Keynesian) describe the effect of AD on output, thereby making or denying space for fiscal policy to impact output. The neo-Ricardian hypothesis (NRH) concerns the effect of bond-financed deficits on AD. The NRH turns on the microeconomic behavior of households and can therefore hold in principle in both classical and Keynesian models. Recent new Keynesian arguments about fiscal policy being effective at the zero lower bound represent another capital market imperfection critique of the NRH.

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Available abstract

The short-run macroeconomic effectiveness of fiscal policy depends primarily on the effect of policy on aggregate demand (AD) and the effect of AD on output. This paper examines how macroeconomic perspectives (Keynesian, Post Keynesian, monetarist, classical, new classical, and new Keynesian) describe the effect of AD on output, thereby making or denying space for fiscal policy to impact output. The neo-Ricardian hypothesis (NRH) concerns the effect of bond-financed deficits on AD. The NRH turns on the microeconomic behavior of households and can therefore hold in principle in both classical and Keynesian models. Recent new Keynesian arguments about fiscal policy being effective at the zero lower bound represent another capital market imperfection critique of the NRH.

Key concepts: Economics, Keynesian economics, Fiscal policy, New Keynesian economics, Monetary policy, Monetarism, Capital (architecture), Macroeconomics

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