Mt IGH employment, rising outpint of goods and services, and relatively stable pn'ices are three widely accepted national economic goals. Responsibility for' economic stabilization actions to meet these goals has been assigned to monetary and fiscal amrthor-ities. The Federal Reserve System has the major responsibility for monetan'v management. Fiscal actions involve feden'al government spending plans and taxing provisions. Governmental units involved in fiscal actions are the Congress and the Administr'alioti, including the 'i'r'easun'y, the Bureau of the Budget, and the Council of Economic Advisers. This ar-tide reports the results of recent n-esean'ch which tested three commonly held pn-opositions concerning tile n-eiative inipon-tance of monetary arid fiscal actions in implementing economic stabilization policy. These propositions are: the nesporise of economic activity to fiscal actions n-dative to that of monetary actions is Ill greater, (2) more pr'edictable, and (3 fasten'. Specific meanings, fon' the purposes of this anticle, of the bi-oad ten-ms used in these propositions are pn-esented later'.

EMPLOYMENT, rising output of goods and services, and relatively stable prices are three widely accepted national economic goals. Responsibility for economic stabilization actions to meet these goals has been assigned to monetary and fiscal authorities, The Federal Reserve System has the major responsibility for monetary management. Fiscal actions involve Federal Government spending plans and taxing provisions. Governmental units involved in fiscal actions are the Congress and the Administration, including the Treasury, the Bureau of the Budget, and the Council of Economic Advisers. This article reports the results of recent research which tested three commonly held propositions concerning the relative importance of monetary and fiscal actions in implementing economic stabilization policy. These propositions are: The response of economic activity to fiscal actions relative to that of monetary actions is (I) greater, (II) more predictable, and (III) faster. Specific meanings, for the purposes of this article, of the broad terms used in these propositions are presented later. This article does not attempt to test rival economic theories of the mechanism by which monetary and fiscal actions influence economic activity. Neither is it intended to develop evidence hearing directly on any causal relationships implied by such theories. More elaborate procedures than those used here would he required in order to test any theories underlying the familiar statements regarding results expected from monetary and fiscal actions. However, empirical relationships are developed between frequently used measures of stabilization actions and economic activity. These relationships are consistent with the implications of some theories of stabiliza-°T he authors give special thanks for helpful cormuents on

Frank de Leeuw and John Kalchbrenner is in reference to an earlier article of ours in which we presented evidence bearing on familiar statements regarding the relative importance of monetary and fiscal actions in economic stabilization. In this "Reply" we present additional analysis and evidence relating directly to the issues they have raised. Summary of Issues Raised In our November 1968 article we estimated the response of total spending in the economy (an endogenous or dependent variable) to changes in alternative summary measures of monetary and fiscal actions (exogenous or independent variables). Dc Leeuw and Kalchbrenner suggest two criteria for choosing exogenous policy variables: (1) the variables must be under the control of polieymalcers; and (2) the variables must not be "terribly sensitive to current movements in the endogenous variables." They say that "failure to meet this second requirement has been a major criticism of regressions of GNP on the money supply." The use of the money supply as a measure of the influence of monetary actions will be discussed briefly at the end of this Reply.

Explanation and Analytical Use I HE MONETARY BASE recently has achieved prominence as a measure of monetary influence on the economy. Other aggregates often used are the money stock defined as cunency plus demand deposits held by the nonbank public, money plus time deposits at commercial banks, member bank reserves, bank credit, liquid assets, and total credit, Other frequently used measures of monetary actions include market interest rates and so-called marginal reserve measures such as member bank excess reserves, borrowings from Reserve banks, and free reserves. 947 1948 949 950 95 '952 53 954 955 :956 937 1958 i959 960 '96: 962 t~63 966 965 966 .fl~•Q62

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