by Imran Rahman
Fiscal variable - a variable that changes when fiscal policy changes
Monetary policy - management of money supply and interest rates to influence the economy
Monetary variable - a variable that changes when monetary policy changes
In an ideal Keynesian economy, economists favour the use of fiscal policy to increase demand to hopefully induce healthy long term growth for an economy. Monetarism holds monetary policy in the highest regards in reference to the bank’s influence over the economy, often believing that the circulation of money is the principal factor in an economies success. Both fields have contrasting judgments on how relevant economic entities should behave when intervening in markets and the raging debate between the use of monetary and fiscal policy has sparked a fire in the field of economics; parting like minds and creating one of the many paths between economics and politics.
Equations can be used to determine the success rate of an economy in relation to the policies used. These equations can be daunting but the relation between the fiscal and monetary variables to produce an overall value is the only relevant part that you need to understand. David Meiselman (one of the founders of modern monetarism) published a paper introducing an equation to determine the success rate of fiscal and monetary policies in consumption at any given time in an economy.
The formula contains certain fiscal and monetary variables. When monetary variables were tweaked, the impact on consumption Ct (something essential for the economy which also shows if the economy is doing good or not ) was larger than that of their fiscal counterparts (monetary policies had a better influence on the economy), solidifying views of monetary economists and changing views of others.
Another prime example of monetary policies mathematical relevance in an economy is through the st lewis equation. (a derivative equation)
ΔYt = α + ΔMt +Δ(Rt-Et) +ΔZt ,
With ΔYt being the change in nominal GNP (a measure of how good an economy is doing), again a pattern emerges. A change in the monetary variables present in the equation has a bigger influence on the overall GNP proving that monetary policy is the most important policy.
But then again Keynesian economists argued that an economy cannot be graphed accurately with a few random variables. A real economy has many driving factors that influence it such as exports and imports, none of which are mentioned in the equations. The validity of the equations was also brought to light when one of the fiscal variables was measured incorrectly, changing the results which were published on Meiselman’s paper.
Overall an economy cannot be graphed accurately from a number of linear equations but by using a number of different variables - we can get closer to a more accurate depiction of how it behaves.
References
Inverse regression equation - http://www.aabri.com/manuscripts/141974.pdf
St Lewis Equation -https://mpra.ub.uni-muenchen.de/28771/1/MPRA_paper_28771.pdf
GNP - https://www.investopedia.com/terms/g/gnp.asp
Least Squares Regression - https://en.wikipedia.org/wiki/Least_squares
Monetary Policy - https://en.wikipedia.org/wiki/Monetary_policy
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