What Is The Affect Of Changing The Mix Of Monetary And Fiscal Policies?
To understand the impact of changing the fiscal and monetary mix, let’s examine a specific set of policies. Suppose that the federal government reduces the federal budget deficit by $100 billion and that higher monetary growth exactly offsets the contraction impact of the fiscal steps. This package is similar to Clinton’s deficit cutting package enacted in 1993 along with a monetary policy that offset the drag from higher taxes and lower government spending. The simulation contains one particularly interesting result: Net exports raise far more than either housing or business fixed investment. This occurs because of the strong depreciation of the dollar, which results from the lower interest rates. While this result is clearly sensitive to the reaction of financial markets and exchange rates to the deficit reduction package, it suggests that some of the popular analyses of the impact of such a package may be misleading. Many analyses have argued that a deficit reduction package would h
