Thomas R. Beard

Deficits, money and inflation: Comment☆

Abstract This paper re-examines the fiscal policy-money growth linkage analysed by Hamburger-Zwick (1981) in this Journal . Newly revised national income accounts data are employed. Unlike Hamburger-Zwick we do not find any strong evidence of a positive Federal budget deficit-money growth relationship over the period 1961–1974. When the estimation period is extended to 1976 and then to 1978, the results suggest no relationship between deficits and money growth.

The Short Run Impact of Fiscal Policy on the Money Supply

Surprisingly little research effort has been devoted to the study of the impact of fiscal variables on the money supply. Furthermore, the limited amount of empirical evidence is often ambiguous and contradictory. Both Froyen [10] and Barro [1] find some evidence of a positive relationship between fiscal expansion and either the money supply or a monetary policy variable, implying that the monetary authorities tend to accommodate fiscal policy. Some evidence of a negative relationship is found in studies by Wood [27], Friedlaender [9], Gordon [13], and Cacy [3]. This implies that monetary actions tend to offset, rather than accommodate, expansionary fiscal actions. The absence of stronger empirical support for a positive fiscal policy-money supply relationship seems surprising in view of the frequently heard argument-often associated with the monetarists, as in Fand [6] and Buchanan and Wagner [2]-that large fiscal deficits typically result in substantial increases in the monetary aggregates. Exactly how this process is supposed to work is not always clear, but perhaps a typical explanation is outlined by Francis [8]. The Federal Reserve is seen as having an over-riding concern with stabilizing interest rates, so that fiscal expansion leads more or less mechanically to an increase in the money supply. An expansionary fiscal policy action results in aon budget deficit which must be financed through issuance of government securities; the sale of these securities to the private sector puts upward pressure on market interest rates; this upward pressure is countered by Federal Reserve purchases of outstanding government securities, thereby monetizing, at least in part, the debt issued to finance the deficit. But to consider interest rate stabilization-or financial market stability-as the single goal of the Federal Reserve would clearly be extreme. Previous studies which have estimated policy reaction functions for the Federal Reserve-including those of Wood [27], Friedlaen-

The impact of budget deficits in the interwar period

Abstract Five- and six-variable vector autoregressions are estimated, and the effects of deficits on interest rates, money, production, and prices are analyzed through the computation of likelihood ratio tests, variance decompositions and impulse response functions. A Monte Carlo simulation technique is used to estimate standard errors. Systems are analyzed for two alternative time periods that have been used to represent the interwar period. The study concludes that July 1922–June 1938 is the more appropriate period for analyzing deficits. Our results indicate that deficits have no major effects on the non-fiscal variables in this period.

Government Budgets and Money: How Are They Related?

Do deficits necessarily result in money-supply increases and inflationary consequences? The authors review the recent extensive literature on the relationship between fiscal variables and the money supply.

Do budget deficits matter? Some pre-world war II evidence

Abstract We estimate five-variable vector autoregressions comprising deficits, money, prices, industrial production, and interest rates. The impact of budget deficits is evaluated by variance decompositions. In estimating vector autoregressions for the July 1922–June 938 period we first use a technique in which lag lengths differ for each equation and for the same variable across equations. We next estimate vector autoregressions using a common lag length for the same time period and for two subperiods. While the impact of the deficit varies, there is n o evidence substantial debt monetization or of important effects on the other variables.

Spatial Variations in Unemployment and Inflation: Some Implications for Fiscal Policy

In this paper we consider the spatial dispersion of unemployment vis-à-vis that of inflation and the implication of this relative dispersion for fiscal policy. Two empirical tests yield results that are consistent with our a priori expectations that inflation is more evenly distributed throughout the economy (i.e., less dispersed spatially) than is unemployment. Using a simple short-run model, we argue that tax policy should be geared to a price stability objective and expenditure policy to a full employment objective. Consequently, the Phillips curve dilemma could be lessened by the appropriate use of tax and expenditure policy.