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The Dynamic Impacts of Government Expenditure and the Monetary Base on Aggregate Income: The West German Case, 1965 to 1974
Frowen, Stephen F. | Arestis, Philip
Credit and Capital Markets – Kredit und Kapital, Vol. 9 (1976), Iss. 3 : pp. 368–383
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Frowen, Stephen F.
Arestis, Philip
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Abstract
Summary The Dynamic Impacts of Government Expenditure and the Monetary Base on Aggregate Income: The West German Case
This paper deals with the dynamic impacts of government expenditure and the monetary base on aggregate income; thus some light is thrown on the dynamic paths through which these instruments of economic policy affect the economy in the short run. A simple dynamic macroeconomic model is developed with the money supply being endogenously determined by a short-term rate of interest, the discount rate and the monetary base. The short-term rate of interest is determined by the supply of and demand for money, the latter being a function of the level of income, short-term interest rates and the lagged money stock. The short-term interest rate is assumed to influence the long-term rate via a stable term structure of interest rates. The model further assumes that the level of both construction investment and fixed capital formation is influenced by the long-term interest rate, whereas consumption expenditure is a function of the money stock. The empirical performance of this model is sufficiently satisfactory to obtain a fundamental dynamic equation - which is found to be stable - from which the time paths of the effects of changes in government expenditure and the monetary base on the gross national product are derived. With the exception of the first two quarters, the effect of changes in the monetary base on the gross national product is stronger than that of changes in government expenditure. The latter, though, has a more immediate impact which, however, is dispersed with far greater speed than that of the monetary base.