An Aggregative Theory for a Closed Economy

For more than a generation, aggregative analysis of a closed economy has remained within the confines of the Keynesian framework as interpreted by Hicks (1937). Metzler (1951), Patinkin (1965) and others provided an alternative interpretation of Keynes (1936). Later extensions introduced anticipations and growth without altering the main qualitative conclusions. In both interpretations, the short-run response to monetary and fiscal policy is transmitted mainly by interest rates and depends on properties of the demand function for money and the expenditure function. A large interest elasticity of the demand for money increases the short-run response of output to fiscal policy. A large interest elasticity of consumption or investment expenditure increases the short-run response of output to monetary policy.