Accession Number : ADA138502

Title :   Fiscal and Monetary Policy in a General Equilibrium Model,

Corporate Author : YALE UNIV NEW HAVEN CT COWLES FOUNDATION FOR RESEARCH IN ECONOMICS

Personal Author(s) : Bewley,T

PDF Url : ADA138502

Report Date : 27 Jan 1984

Pagination or Media Count : 92

Abstract : This is a theoretical study on monetary and fiscal policy in a general equilibrium model with rational expectations, with perfect markets for current goods, but with restrictions on borrowing and insurance and with a Clower constraint on payments. Fiscal actions are understood to be manipulations of taxes and subsidies. Monetary policy is understood to be the purchase and sale of government debt or control of the banking system's ability to lend. The main result of this paper, Theorem 4.1, may be misinterpreted as saying macroeconomics is easy. Here is a model in which phenomena resembling trade cycles may occur, and it is proved that policy may prevent them. Furthermore, the result is not at all surprising once one realizes that it is an analogue of the second welfare theorem. However, one should be aware that there are strong hypotheses underlying the model. These are that expectations are rational and that random changes of aggregate importance are revealed to everyone simultaneously. The latter assumption, of course, precludes the asymmetric information which underlies the so-called island models of macroeconomic theory.

Descriptors :   *Mathematical models, *Economic models, *Macroeconomics, *Finance, *Policies, Equilibrium(General), Economic analysis, Money, Banking, Taxes, Risk, Hypotheses

Subject Categories : Economics and Cost Analysis
      Numerical Mathematics

Distribution Statement : APPROVED FOR PUBLIC RELEASE