Restrictive Versus Permissive Money: Two Is-Lm Views of Pure Fiscal Action

Abstract

Analyzing pure fiscal actions in an IS-LM setting is a common exercise in current macromonetary textbook literature. As far as the role these analyses Abstract assign to the monetary sector is concerned, this literature offers two contradictory portrayals. One describes thefiscal action's initial impact on aggregate demand as independent of monetary adjustments. The monetary sector in this view is relegated to a secondary restrictive role. The other view depicts the initial impact of the fiscal action as being grounded in a simultaneous and supportive monetary disequilibrium. This disequilibrium, moreover, is seen as persisting throughout the multiplier process. Little attention has been directed to this contradiction, even though fundamentally different perspectives on the role played by monetary adjustments are involved. This paper contains an outline of the nature of the contradiction and a discussion ofthefactors important in its resolution.