On the Effectiveness of Keynesian Policies in General Equilibrium
On the Effectiveness of Keynesian Policies in General Equilibrium

Summary/Abstract: In a general equilibrium model with fully rational agents and built - in micro - level uncertainty we show that debt - financed government spending on consumption can be welfare improving at all horizons despite the fact that it inhibits the process of physical capital formation. In addition we show that the impact of a direct demand stimulus is likely to be more pronounced than the impact of a tax cut on economic activity. Finally, we argue that monetary policy is less efective during recessions than expansions. Our findings are consistent with Keynes's view that recessions should be fought with fiscal policy rather than monetary policy, and provide rationale for thr concept of liquidity gap.

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