The monetary/fiscal policy debate, otherwise known as the Ando–Modigliani/Friedman–Meiselman debate (or AM/FM debate from the main instigators' initials, and for this reason sometimes jokingly called the "radio stations debate"), was the exchange of viewpoints about the comparative efficiency of monetary policies and fiscal policies that originated with a work co-authored by Milton Friedman and David I. Meiselman and first published in 1963, as part of studies submitted to the Commission on Money and Credit. Surveys of American Economic Association (AEA) members since the 1970s have shown that professional economists generally agree with the statement: "Fiscal policy has a significant stimulative impact on a less than fully employed economy." Conversely, while a 2000 survey of AEA members found that while 72 percent generally agreed with the statement that "Management of the business cycle should be left to the Federal Reserve; activist fiscal policy should be avoided", surveys from 2011 and 2021 found 56 percent and 67 percent disagreed respectively.
Origin In the early 1960s, contributing to the studies invited by the Commission on Money and Credit, Milton Friedman and David Meiselman published a study whereby, they found that "[e]xcept for the early years of the Great Depression, money is more closely related to consumption than is autonomous expenditures," claiming moreover that "[t]he results [of the tests] are strikingly one-sided". They used the following reduced form, least squares regression equation to compare the effectiveness of monetary and fiscal policies; in effect, to compare Keynesian and monetarist theories:
C t = α + V M t + K A t {\displaystyle C_{t}=\alpha +VM_{t}+KA_{t}} (1) where C is induced private consumption, α is a constant, V represents money velocity, M is approximately M2, K represents an expenditure-multiplier, A is autonomous expenditures, and t represents time. Friedman and Meiselman found that, whether using annual data from 1897 to 1958 or quarterly data from 1946 to 1958, and whether using only real, contemporaneous data, or experimenting with various time lags, private consumption was not statistically significantly affected by discretionary fiscal policy, but was by monetary policy. They stated that their monetary variables were "highly correlated" with consumption, whereas fiscal policy variables were not.
Debate The Friedman/Meiselman 1963 paper was addressed with numerous articles, where counter-arguments were made: The model was erroneously specified because important and statistically relevant variables were omitted; the data used were not actually coincident with the theory behind them; there was no correction for the "thermostat effect" so that even if fiscal policy is effective it will seem to have a neutral or even negative relationship with spending rather than the positive effect it is theorized to have; and that the results were time-specific.
Hester claims bias In 1964, Donald D. Hester criticized the F/M paper for "bias" against a "Keynesian" outcome. For that purpose, Hester argued that government deficits are endogenously determined, and not exogenously, and thus no single-equation approach could properly capture government spending and deficits, while the same principle applies for short-run private investment. Also, Hester emphasized that the actual data should have been empirically tested in first-differential form so as to extricate the trends of both explanatory variables, and thus demonstrate only the endogenously generated economic growth. Hester stated that, when he tried "improved" data and empirical methods, “the autonomous expenditure theory outperformed the quantity theory [of money],” i.e. Keynesian economics win over monetarist economics.
Friedman/Meiselman respond In a paper published in 1964, Friedman and Meiselman conceded that Hester’s suggestion of using first differences was correct and that it is a better method for their single-equation approach. But they insisted that their interpretations of income and autonomous expenditures are relevant, rejecting Hester’s misgivings. They claimed that Hester’s use of correlation coefficients with his newly defined autonomous expenditures constituted an "unsound argument,"and summarized as follows:
We remain of the opinion that there is a striking division among students of economic affairs about the role of money in determining the course of economic events. One view is that the quantity of money matters little; the other, that it is a key factor in understanding, and even more, controlling economic change. Our paper tried to present some evidence relevant to deciding between these views. The kind of evidence we gave is not the only kind that is relevant and may not be the most important or significant. And, of course, much other evidence is available from other work by us and by many others. This other evidence needs to be added to and brought to bear on the main issue that divides economists into two groups. Hester does not quarrel with the relevance of our evidence but with the particular form of the income-expenditure theory we use. [Hester's] criticism of our procedure rests primarily on a misunderstanding of the theoretical basis of our approach. He offers neither theoretical argument nor empirical evidence in support of his alternative formulation. Hence his criticism is largely beside the point. That is unfortunate. We badly need work on these problems that will clarify the issues involved. We can ill afford to waste the energy, interest, and ability that Hester displays in his paper on frivolous quibbling.
Ando and Modigliani: both policies affect outcome Albert Ando and Franco Modigliani, in a paper published in 1965, disputed the findings presented in the 1963 Friedman/Meiselman work. Ando and Modigliani claimed that
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