Tax Cuts And Interest Rate Cuts: An Empirical Comparison Of The Effectiveness Of Fiscal And Monetary Policy

Abstract

Can expansionary fiscal or monetary policy stimulate the U.S. economy in light of recent events? Using an Error-Correction-Vectorautoregression, we examine the relative effectiveness of both types of governmental stabilization policy. Unlike previous studies, we use a more general error correction vectorautoregression (ECM) approach. Our focus is on determining the relative explanatory power of measures of monetary policy (M2 and the Federal Funds Rate) and fiscal policy (marginal income tax rates and government spending) in explaining movements in consumption, investment, and output. Results suggest that monetary policy is relatively more powerful than fiscal policy.