The Efficacy of Bond-Financed Fiscal Policy

Abstract

This article examines the impact of fiscal policy on economic activity in the framework of the important model developed by Blinder and Solow which assesses the macroeconomic impact of federal budgetary actions. In addition to raising some questions about Blinder and Solow's conclusions regarding the efficacy of bond-financed fiscal policy, we introduce some logical extensions of their original model to examine the robustness of various income and interest rate multipliers. It is shown that even minor modifications are sufficient to bring about reversals in signs of these key multipliers. In sum, this article not only answers some important questions but also raises equally significant issues regarding the efficacy of fiscal policy

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