Effectiveness of Fiscal Policy: Literature Review

Abstract

The article examines the effectiveness of fiscal policy through three distinct axes. Firstly, it relies on the IS-LM model in a closed economy to analyze how fiscal policy can influence economic equilibrium, emphasizing the multiplier effect of public spending from a Keynesian perspective. Subsequently, an analysis is provided in an open economy, integrating the external constraint of the balance of payments equilibrium, underscoring the importance of considering the nature of the exchange rate regime (fixed or flexible) and the degree of capital mobility to assess the effectiveness of fiscal policy. Finally, the article explores the aggregate supply and demand model, shedding light on the relationships between fiscal policy and macroeconomic aggregates, while taking into account the impact of economic agents' expectations on the effectiveness of budgetary measures. This latter model is presented as a response to the inherent limitations of the traditional IS-LM model.