New Measures of Fiscal and Monetary Policy, 1958-73.

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      This article explores measures of the effects that fiscal and monetary policies have had on macroeconomic activity in the U.S. from 1958 to 1973. Indicators of fiscal and monetary policy typically are designed to show the effects of government or Federal Reserve actions on some endogenous variable of interest, typically real or nominal gross national product. In historical appraisals of past policy actions, where the focus is on what the stabilization authorities did and why their actions did or did not work, it is obviously necessary to compare the observed state of the economy with the situation that would have prevailed without the policy actions. Similarly, in designing stabilization policies for the present or the future, comprehensive measures of policy influence provide quantitative content to the vague notions of expansionary or contractionary policies. Monetary and fiscal policies are inter-related in a number of ways. First, fiscal policies which change income and interest rates automatically change the money supply. Second, because of nonlinearities in the model, fiscal effects depend in principle on monetary actions and conversely. That is, one would expect the combined effect of varying fiscal and monetary instruments together to differ from the sum of the two effects taken separately. However, a third aspect of monetary and fiscal interaction is quite significant. Monetary and fiscal policy may be acting either in unison or at cross purposes at different points in time.