The Non-Keynesian Effect

What Is the Non-Keynesian Effect?

As mentioned in Chap. 2, the non-Keynesian effect is as follows. A decrease in government spending and/or an increase in taxes can stimulate aggregate private demand in a situation where government spending is inefficient or the government deficit is large. In this regard, the government may attain fiscal consolidation and macroeconomic recovery at the same time. The plausibility of this seemingly paradoxical effect depends on the fiscal situation, the sustainability of fiscal reform, and/or the anticipation of future fiscal policy.

Note that debt neutrality means that there is no effect on private consumption if government spending is fixed and a positive effect on private demand if government spending declines. The conventional Keynesian effect normally means that there is

Table 4.1 The non-Keynesian effect

Tax increase

Spending cut

Keynesian effect

Private demand —

Private demand —

Non-Keynesian effect

Private demand +

Private demand +

Debt neutrality

Private demand 0

Private demand +

a negative effect on private consumption because of a tax increase and a negative effect on private demand if government spending declines. Thus, the non-Keynesian effect is just opposite to the Keynesian effect. See Table 4.1 for a comparison of these effects.

 
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