Government policy dynamics in structural and reduced form estimation

This study aims at empirically testing the assertions of Monetarists and Keynesians as to the relative importance of monetary versus fiscal policy instruments. A small macro-economic model for the US economy has been constructed which seems to be acceptable to both Monetarists and Keynesians. Finally the unrestricted reduced form approach was compared to the restricted one resulting from the estimation of the structural model. While the unrestricted approach indicates that the potency of monetary policy exceeds that of fiscal policy, the restricted reduced form approach leads to the opposite conclusion.