The IS-LM model has largely contributed to the spread of a belief that a reduction of fiscal deficit has to lead to a drop in output in the short term. However, if one modifies even a single assumption of that model, the relationship between change in output and fiscal deficit respectively may become non-Keynesian. The article presents effects of the modification of demand for money proposed by Mankiw and Summers (1984). Additionally, the model analyzed in the article is opened for international trade and capital flows. The article shows that the more accurately the assumptions of IS-LM reflect relationships observed in a real economy, the more uncertain the Keynesian reaction of output on changes in fiscal stance.

Keywords: aggregative models, non-Keynesian effects, open economy.

  Andrzej Rzońca, Effects of Tight Fiscal Policy in Modified Mankiw and Summers Model - plik pdf; (1.4 MB)