Economic Policy Effectiveness in Hicksian Analysis: A Note

Jaege , Klaus A icle Economic Policy E ec i eness in Hicksian Analysis: A No e K edi und Kapi al P o ided in Coope a ion wi h: Duncke & Humblo , Be lin Sugges ed Ci a ion: Jaege , Klaus (1981) : Economic Policy E ec i eness in Hicksian Analysis: A No e, K edi und Kapi al, ISSN 0023-4591, Duncke & Humblo , Be lin, Vol. 14, Iss. 2, pp. 177-179, h ps://doi.o g/10.3790/ccm.14.2.177 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/292893 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ Economic Policy E ec i eness in Hicksian Analysis: A No e By Klaus Jaege , Be lin In a ecen issue o his Jou nal Ta las (1980) compa es wo e sions o an IS-LM model wi h upwa d-sloping IS cu es (Cebula 1976, Silbe / Bu ows 1971, 1974) wi h ega d o hei s abili y p ope ies. Acco ding o Ta las he espec i e s abili y condi ions o bo h models en ail di - e ing policy implica ions which he sums up in wo p oposi ions (p. 259). Fo he sake o con enience hey a e epea ed he e: P oposi ion !: I he IS cu e slopes upwa d because all he p opensi ies o spend wi h espec o income sum o mo e han uni y (Silbe /Bu ows), hen he less he in e es -sensi i e is he demand o money, he soone does he sys em eac o exogenous policy shocks. In he e en whe e he IS cu e slopes upwa d due o a posi i e associa ion o in es men and consump ion o he in e es a e (Cebula), he mo e in e es elas ic is he demand o money he as e he sys em eac s o exogenous shocks. P oposi ion 2: In a Silbe /Bu ows amewo k, he s abili y ange o he sys em eaches i s maximum alue as he in e es elas ici y o he demand o money app oaches ze o. In a Cebula amewo k, howe e , he sys em a ains i s maximum s abili y ange as he in e es elas ici y o he demand o money app oaches minus in ini y. The s abili y analysis and hence bo h p oposi ions a e based on he assump ion (p. 255): .. ha he mone a y sec o adjus s ins an a- neously3 o ex e nal shocks so ha he LM equa ion is always sa is ied du ing he p ocess o adjus men om one equilib ium o ano he " and acco ding o n. 3 (p. 255): "I should be no ed ha his assump ion does no a ec he s abili y condi ions o he sys em in any way, ...". In he ollowing i is shown ha his is no ue and as a co olla y ha especially he i s pa s o bo h p oposi ions a e w ong. Using he same no a ion as Ta las he linea adjus men -p ocess in bo h models may be desc ibed mo e gene ally as: a) ~d ==k[i(Y,i) + c<Y>*> -yJ 12 K edl und Kapi al 2/1981 OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.14.2.177 | Gene a ed on 2023-01-16 12:46:14 178 Klaus Jaege di (2) — = m [L (Y, i) - Mo] m,k = cons . > 0 d Ta las assumes: k = 1, L (Y, i) = Mo and hence in his analysis m is unspeci ied (o in ini e). De ining Y*, i* as he equilib ium alues o Y and i espec i ely and y = Y — Y*, z = i — i* as de ia ions om hese equilib ium alues he sys em (1) - (2) can be pu in o a linea and homo- geneous o m by aking linea app oxima ions in he neighbou hood o equilib ium (Taylo 's heo em): (3) ~ = klIY + CY-l)y + k di + cy z dz (4) — = mLYy + mL{z The sys em (3) - (4) has a s able equilib ium i he cha ac e is ic oo s o he ma ix ( m (ly + Cy - 1) k (I, + C ) mLy mhi ha e nega i e eal pa s. Acco ding o he Ru h-Hu wi z heo em his is he case, i De (A) > 0 and T (A) < 0, i.e. i (5) (ly + Cy - 1) Lj - (Ii + Ci) Ly > 0 and (6) k (ly + Cy - 1) +mLi < 0 The ollowing es ic ions a e imposed on he sys em: Cebula: ly + Cy - 1 < 0; Ii} C{ > 0; Ly > 0; U < 0. Silbe /Bu ows: ly + Cy - 1 > 0; Iiy Ci <0; Ly > 0; U < 0. In e es ing enough, wi h hese speci ica ions he Cebula model is always s abel i only (5) is sa is ied, because (6) is nega i e o all alues o — oo < Li < 0 bu his is no ue wi hin he model o Silbe / Bu ows; his is he poin which Ta las missed. As Li app oaches ze o, (6) becomes posi i e and hence he equilib ium in a Silbe /Bu - ows amewo k is in his case uns able o he gene alized adjus men - p ocess (1) - (2) wi h k, m > 0. Fu he mo e, assuming s abili y in he Silbe /Bu ows model, om (6) he ange o Li is (i (5) is sa is ied): - oo < Li < —^-(Jy + Cy - 1). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.14.2.177 | Gene a ed on 2023-01-16 12:46:14 Economic Policy E ec i eness in Hicksian Analysis: A No e 179 k Consequen ly, as L* app oaches — — (ly + Cy — 1), he le -hand side o (5) becomes mo e posi i e bu he le -hand side o (6) becomes simul aneously less nega i e and hence no hing can be said abou he sys em's eac ions o policy changes. The e o e only o he special case m = 0 he i s pa s o Ta las' wo p oposi ions a e co ec . One las poin mus be men ioned. F om (5) and (6) i ollows ha s abili y in he Silbe /Bu ows model is only gua an eed, i I (ly + Cy - 1) L,|<|(I, + c ) Ly | , i.e. i ¿(Iy + Cy-l)2<|(Ii + Ci) Ly| k is sa is ied. Hence o all alues o L*< (ly + Cy — 1) he equi- 771 lib ium in his model is likely o be a saddle poin i he disequilib ium adjus men -p ocess on he commodi y ma ke is as compa ed wi h he p ocess in he mone a y sec o (g ea alues o c/m). Re e ences Bu ows, Paul: The Upwa d Sloping IS Cu e and he Con ol o Income and he Balance o Paymen s, in: Jou nal o Finance, Vol. 29, 1974, 955 - 961. — Cebula, Richa d J.: A B ie No e an Economic Policy E ec i eness, in: Sou he n Economic Jou nal, Vol. 43, 1976/77, 1174 - 1176. — Silbe , William L.: Mone a y Policy E ec i eness: The Case o a Posi i ely Sloped IS Cu e, in: Jou nal o Finance, Vol. 26, 1971, 1077 - 1082. — Ta las, Geo ge S.: Economic Policy E ec i eness in Hicksian Analysis: An Ex ension, in: K edi und Kapi al, 13. Jah g., He 2, 1980, 252 - 262. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.14.2.177 | Gene a ed on 2023-01-16 12:46:14