Balanced Demand and Supply‐Side Fiscal Policies

Abstract

This paper analyses the general equilibrium and disequilibrium effects of fiscal policy when fiscal instruments have direct impacts on both aggregate supply and demand. A model is specified which incorporates the direct impacts of expenditure and tax instruments on the behavioural function for individuals and firms and which explicitly recognises the role of public production and supply. In contrast to simple Keynesian and neoclassical models, this model involves direct supply‐side crowding out and budget composition effects that operate on both aggregate demand and supply. It also reveals the relative efficiency of various “balanced instruments” under Keynesian and neoclassical conditions.