Fiscal Policy and GDP

Godley and McCarthy maintain that an increase in government expenditures increases GDP while a tax reduction indirectly increases GDP (p. 18). Moreover, the authors suggest that the effect (which they call the "fiscal stance") can be determined by dividing government expenditures by the average tax rate. The authors further suggest that they are not the first to suggest this relationship, and point out that Carl Christ at Johns Hopkins postulated similar ideas more than 30 years ago.

What sets Godley and McCarthy's work apart is that they use this initial theory to move into Congressional Budget Office (CBO) predictions about upcoming revenues and expenditures, and suggest eventually that Americans' lack of savings and high dependence on indebtedness puts the nation at an

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io is not directly observable. It is, however, the case that the net stock of these financial assets, measured ex-post facto, has hovered around 50 percent of the annual flow of government outlays plus exports for the past twenty years. So, for this period at least, the nominal GDP should track the AFS one for one, with a mean lag of only half a year. This is the amount of time that must elapse before the inflows become outflows, and it is well within the time span that would make the AFS relevant for policy-making purposes. It is always possible that the concept of a "mean lag" is operationally useless, as Robert Solow pointed out: "The lag needs to be studied empirically. The dynamics may be oscillatory or unstable. In any case, aggregate income will not be related to autonomous spending by a distributed lag all of whose weights are positive. So the mean lag is simply not informative."(3) We put Solow's negative hypothesis, rather late in the day, to the empirical test for which he called. First, we constructed the AFS variable, that is, exports and net foreign transfers plus general government outlays all divided by the average tax rate plus the import propensity, with all the relevant variables cyclically
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Some common words found in the essay are:
Robert Solow, á á, á á á, Office CBO, Hyman Minsky, Medicare Medicaid, Strategic Implications, Stance AFS, Picture Figure, Tobin Buiter, Godley McCarthy, Social Security, fiscal stance, fiscal policy, tax rate, net lending, government expenditure, trade performance, average tax rate, average tax, mean lag, godley mccarthy, divided average tax, congressional budget office, real national income,
Approximate Word count = 5420
Approximate Pages = 22 (250 words per page)

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