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

I. HE MONETARIST VIEW that changes in the money stock area primary determinant of changes in total spending, and should thereby be given major emphasis in economic stabilization programs, has been of growing interest in recent years. From the mid-1930's to the mid-1960's. monetary policy received little emphasis in economic stabilization policy. Presumed failure of monetary policy during the early years of the Great Depression, along with the development and general acceptance of Keynesian economics, resulted in a main emphasis on fiscal actions-Federal Government spending and taxing programsin economic stabilization plans. Monetary policy, insofar as it received any attention, was generally expressed in terms of market rates of interest. Growing recognition of the importance of money and other monetary aggregates in the determination of spending, output, and prices has been fostered by the apparent failure of stabilization policy to curb the inflation of the last half of the l 96 0's. Sharply rising market interest rates w'ere interpreted to indicate significant monetary restraint, while the Revenue and Expenditure Control Act of 1968 was considered a major move toward fiscal restraint. Despite these policy developments, total spending continued to rise rapidly until late 1969, and the rate of inflation accelerated. Those holding to the monetarist view were not surprised by this lack of success aOffering helpful suggestions throughout the study were Denis Karnosky of this bank, William P. Yohe of Duke University and visiting Scholar at this bank, 1969-70, and David Fand of Wayne State University. Susan Smith provided programming assistance and Christopher Babb and H. Albert Margolis advised on statistical problems. The authors thank the following for their comments on earlier drafts, without implying their endorsement of either the methods of analysis or the conclusions F.

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.

S_ HE nmnmnetarist view ti-nat n:l'nanges in the innmney stnmn:k are a primary determinant of changes in total spending, and should thereby be given major emphasis iii economic stabilization pr-ogr'aniis, Imas been of growing interest in recent year's, From the mid-I 930s to the mid-h 960s, mnmnetary policy r'en:eived little emphasis mm economic stabilizatmnmn polky, Pn-esumn,d failnre of unotietaty policy during tite emtr-ly yd,ar's nif time Great iJepression, along with the developniment and genen-al an:n:eptann:e of Keynesian en:nmnonhics, resulted in a main ennphasis orm fiscal actinmnms -federal gover'nnnenmt speimdimmg mit-nd taxing programs -in en:ninomic stabilizatioti plans Mninn,tar'v policy, insofar mts it n't,cn,ived any attentiomm, was genet'ally expressed in ten'nms of nmam'ket t'ates of intet'est, Gr'nmmving m'en:nmgnition of thme inm-npon'tar'ice of notmey armnl othmen' motmetary aggr'egates in the deterrninatinmrm of spending, output, and prices has Imeeti fnistered by the appat-ent failut-e of stabilizatinmn pnmlicy to cur'b the inflation of the last half of thn, l9GOs, Sharply rising market immterest rates wet-c interpreted to indicate significanmt niommetarv restrainmt, wimihe the Revenue and Expetmditun-e Contn'ol Act of 1968 was cnmnsinln,red a major' moyn~towanil fisn:al r'n~str'aint, Despite these pohicy developments, total spending continued to rise t-apidly until latn, 1969, and tb-ic i-ate of inflation acceln,rated, 't'hosn, holding to ti-ne nhhonetan'ist view wem'e not sun-pt-msed by this lack nif sun:cess in curbing excessive growth iii total spending, lat-gely because the motey stock grew at a historically m'apid r'ate during time four years n~ndingin late 1968. Ecnmnonic developnments fronm 1965 tlmrough 1969 were in genen-al agm'eement witim tIme expectations of thn, tnonetan'ist view, This article develops a mnidel (lesigned to anmalyze n,conomic stabilization issues withitm a fr'amewor'k whichm focuses nit-I the influetmn:e of nmmonetamy n,xparmsion on total spenmding. Mnmst of time tnajnit' econonm-netr'ic niodels imave nnit assigned at-n in-npnmt'titnt n-nun, to the tinorney ston:k n-nt-tn-n any othmen' tnone tam)' aggm'egate,' F'urtbmen'mnore, most ecotmnitnetr'in: nmodels corttaiti a iar'ge tmnnmhmer of hiehavinir'al hypotheses to be enlipici-