By J. O. N. Perkins (auth.)

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4) A bond-financed cut in income tax is less inflationary than a cut in interest rates for a given effect on employment for all countries; so that a cut in income tax coupled with a tightening of monetary policy in an appropriate combination could both raise employment and reduce the upward pressure on prices in all countries for which these measures have both been simulated. But for Canada that combination of measures could not be used to stimulate real output while reducing Empirical Evidence 43 prices, if one accepts the OECD evidence that for Canada a cut in short-term interest rates is less inflationary than a bond-financed cut in income tax (or a bond-financed rise in government outlays) for a given effect on real output.

3. 5 of a unit but less than one unit can be combined with a tax cut that raises output by one unit, to give both a net rise in output and downward pressure on prices. It should be observed that if the government were unwise enough to try to raise tax rates with the aim of checking inflation, while also increasing government outlays, with the intention of thereby reducing unemployment) for any given rate of increase in prices, or both reduce at any given level of real output, or reduce output (increase unemployment) for any given rate of increase in prices, or both reduce real output (make unemployment worse) and increase the upward pressure on prices.

This also suggests that if one is comparing the relative effects on prices and on real output of alternative measures so far as they operate within countries (rather than through the exchange rate) there is not a clear dichotomy between government outlays and tax cuts on the one hand and monetary policy on the other - an especially clear illustration of the principle that the dichotomy of 'monetary versus fiscal' policy can be seriously misleading. 12 show, for each of the seven countries, money wage rates rose by more, for any given rise in real GOP or employment, when the fiscal stimulus took the form of a rise in government expenditure than when it consisted of a cut in income tax rates.

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A General Approach to Macroeconomic Policy by J. O. N. Perkins (auth.)
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