Monetary versions of the balanced budget multiplier

Abstract

This paper examines the impact of varying the specification of the demand for money on the size of the balanced budget multiplier. The money demand may shift autonomously following a balanced budget change in government spending if private money demand is dependent on disposable rather than total income or if, due to a lag in the government spending process, a nonzero incremental governmental money demand exists. The implications of these assumptions are determined in a pure monetary model and then in an IS-LM model. In each case the balanced budget multiplier differs from the conventional result.