A General Approach to Macroeconomic Policy by J. O. N. Perkins (auth.)

By J. O. N. Perkins (auth.)

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The UK, assume a constant quantity of money). The simulations of cuts in employers' national insurance contributions provide evidence from three of the models that this form of stimulus also operates in a helpful direction on both of the main macroeconomic objectives (in one of them even better than a cut in VAT) - a conclusion that we shall see below is also consistent with the EEC simulations. In one model income tax cuts also reduce prices. When the fiscal stimuli are both accommodated by a sufficiently expansionary monetary policy to hold interest rates constant, the evidence from the UK models is mixed on whether government outlays are more inflationary than income tax cuts; though on the average of the models these results are consistent with the results from the OECD simulations to the effect that the income tax cut is the less inflationary of the two.

Taken as a whole, then, these OECD simulations constitute very compelling evidence for the view that the dichotomy of 'fiscal versus monetary' policy may be misleading and even dangerous. For, on this evidence, the two fiscal measures tested - income tax cuts and increases in government outlays- have different effects on prices for a given effect on output or employment; and the overwhelming balance of this evidence attests the superiority of income tax cuts over government outlays from this macroeconomic viewpoint.

These simulations show that increases in government outlays would for five of the seven countries be the form of stimulus most likely to increase prices if the exchange rate were held constant; in other words, the channel through which monetary expansion tended to be the most inflationary form of stimulus under floating exchange rates was through its effect on the exchange rate itself. 60 • *For this measure, there is no upward effect on prices for Canada, so that the figure is undefined, and the policy measure the least inflationary.

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