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Vol. 68, No. 8
Posted 1986-10-01

The Monetary-Fiscal Policy Debate and the Andersen-Jordan Equation

by Dallas S. Batten and Daniel L. Thornton

Dallas S. Batten and Daniel L. Thornton examine the controversy that emerged following the publication of the 1968 Andersen-Jordan article (see reprint of the original article beginning on p. 29). Andersen and Jordan’s basic finding—that monetary actions have a lasting impact on economic activity while fiscal actions do not—generated immediate criticism, most of it econometric in nature, the authors note. Using the same data set as Andersen and Jordan did, Batten and Thornton investigate the validity of the major criticisms of the St. Louis equation. In particular, they test for bias due to misspecification, the presence of endogenous variables on the right-hand side of the equation, and the omission of certain right-hand-side variables. Moreover, they report findings published elsewhere about the dynamic specification of the St. Louis equation and the imposition of polynomial restrictions. In no instance could the authors find statistical support for the alleged, but previously untested, improprieties involving the estimation of the St. Louis equation.



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