The operating mechanism of fiscal policy. Friction free models - supply effects.
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The article employs some well known types of macroeconomic model to draw attention to the possible supply side effects of fiscal expansion. These effects, mostly simplified or neglected in basic economic training, add new viewpoints to professional thinking on the operation of fiscal policy. The intention is to show that the strong statistical correlation between government expenditures and aggregate economic performance can be triggered by supply mechanisms as well. This is an important statement because the Keynesian IS- LM system has remained to this day the interpretative framework for examining fiscal policy mainly because of its empirical applicability in economic-policy and - with the spread of micro-based neo-Keynesian models - academic discourse. Yet it is far from clear what type or size of role or weight these play in the process of adaptation of nominal frictions to economic shocks. If the relation between government expenditures and output can also be shown in friction free models with perfect adjustment to prices, the analyses must clarify not only the adaptation difficulties, but the subsequent channels.
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