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January 1983, 
Vol. 65, No. 1
Posted 1983-01-01

The Relative Impact of Monetary and Fiscal Actions on Economic Activity: A Cross-Country Comparison

by Dallas S. Batten and R. W. Hafer

Dallas S. Batten and B. W. Hafer use a modified form of the “St. Louis equation” to assess the relative importance of monetary and fiscal actions on economic activity in several developed countries. The purpose of this cross-country comparison is to determine whether the well-known results for the United States—that monetary actions have a permanent influence on GNP growth while fiscal actions have no lasting influence whatsoever—are unique to the United States, or whether they apply to other economies as well. To adjust for the importance of international trade (for the respective economies), Batten and Hafer modify the St. Louis equation, which relates growth in GNP to monetary and fiscal influences, by adding a third influence on GNP growth, the growth of merchandise exports. When Batten and Hafer examine the effects of monetary and fiscal actions on GNP growth for Canada, France, Germany, Japan, the United Kingdom, and the United States, they find that the U.S. results are generally supported across the other nations. Monetary actions have a significant and lasting effect on GNP growth in all six countries. Fiscal actions, on the other hand, are important only in two countries: France and the United Kingdom.