Demand-Side Stabilization Policies: What is the Evidence of their Potential?

IMF Working Papers, December 1, 2000

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Using disaggregated data for the United States, the paper explores effects of the variability of fiscal and monetary policy shocks.
Higher variability of government spending shocks around a steady-state growth trend results, on average, in a decline in aggregate demand growth and inflation, with limited effects on output growth.
Higher variability of monetary shocks results, on average, in an increase in inflation and a decline in output growth.
The results indicate the desirability of avoiding large fluctuations over time in either government spending or the money supply.

Higher variability of government spending shocks:
- Decline in aggregate demand growth (average effect).
- Decline in inflation (average effect).
- Limited effects on output growth.
Higher variability of monetary shocks:
- Increase in inflation (average effect).
- Decline in output growth (average effect).
Policy implication drawn from empirical results: avoid large fluctuations over time in either government spending or the money supply.

Subject: Expenditure, Monetary base, Money, National accounts, Private consumption, Private investment, Production, Production growth
Keywords: aggregate demand demand shock, aggregate demand shift, asymmetric fluctuations, contraction decrease, durable goods, Fiscal policy, government spending shock, Monetary base, monetary policy, money supply, price inflation, Private consumption, Private investment, Production growth, shocks decrease, supply curve, WP

Demand-Side Stabilization Policies: What Is the Evidence of Their Potential?- WP/00/197
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