Fiscal policy, long-run stability and aggregate supply

Abstract

The model developed in this paper incorporates aggregate supply and hence the price level into existing dynamic IS-LM models of flow and stock equilibrium. Whereas the long-run equilibrium position in these models is stable and fiscal policy works regardless of empirical magnitudes when budget deficits are financed by printing money, the introduction of aggregate supply into these models is shown to render the stability of long-run equilibrium and hence the effectiveness of fiscal policy under money financing, open to empirical question. © 1978.