Abstract

Fiscal Policy linked with Active and Passive Central Bank Policy

The theoretical debate on the efficiency of fiscal policy is in need of correction in that it is inadmissible to assume a simultaneous counteracting central bank policy. On the one hand, it is quite evident that the application of different fiscal instruments to achieve various objectives is always most effective in conjunction with a specific central bank policy. Even with the macromodel of extremely simple structure which is here used as a basis, the possibility of greatly diverging effects of fiscal policy under an active central bank policy on the one hand and an extremely passive central bank policy on the other becomes manifest. In this connection it is of substantial importance whether the fiscal authorities orient their action in laying down new combinations of instruments solely to the goods market or simultaneously make allowances for the money market effects of their new activities, that is for all systematic effects of fiscal policy. Considered as a whole, none of the analysed possibilities of active and passive central bank behaviour can be deduced to be invariably macroeconomically advantageous alternatives to a fiscal policy geared to reduction of inflationary effects, securing of full employment and the highest possible national product. This demonstrates once again the necessity of co-ordinating central bank and fiscal policy. Furthermore, it has been shown that tax effects are not - as in the traditional context - related solely to demand for goods. On the contrary, we must reckon with tax schedule changes having a direct effect on the supply of goods, the demand for money and the money supply. This, in turn, gives rise to special systematic effects which depend on the assumed behaviour of the central bank. Lastly, the relevance of value-added-tax modifications could be documented as variations of fiscal instruments. In the theory of fiscal policy, little attention has been paid so far to such problems at macroeconomic level