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The primary objective of this thesis is to develop a methodology for applying econometric models to problems of economic policy, and to illustrate it in terms of fiscal policy by applying it to problems of economic stabilization in Canada during the period 1967-69. It was assumed that the fiscal policy-maker in Canada has a preference (loss) function which is a weighted sum of squared deviations between the actual and the desired values of two target variables (changes in the GNE price deflator and the number of persons unemployed) and three instruments (changes in government expenditure on goods and services, and the personal and corporation income tax rates). Then, an intermediate sized annual econometric model of the Canadian economy was developed, subject to which the preference function was minimized. Since the parameters of the preference function were not given, thirty-six experiments of optimization were made under a range of plausible values of the relevant parameters. It was found that the numerical values of the target variables indicated by the optimal strategy were closer to the desired values and more stable in their movements than actual values. Also the results of various experiments suggested that the optimal strategy was relatively insensitive to changes in parameter values over a rather wide range. / Thesis / Doctor of Philosophy (PhD)

Three Monetarist models--the Netherlands Bank Model, the Polak Model and the St. Louis Model--are critically examined in this study. A structural model has been set up for the St. Louis Model, showing some missing links and variables. The reduced-form approach should not be applied recklessly, i.e. without constructing its theoretical structural equations. Furthermore, in empirical studies, the concepts of stock and flow, and time references and time dimensions should be properly specified; failure to do so can lead to difficulties in interpretation. / The Netherlands Bank Model and the St. Louis Model have been applied to the Canadian economy from 1957 to 1974. The findings from this empirical study are, in general, favourable to the Monetarist hypothesis. The application of the Netherlands Bank Model to the Canadian economy demonstrates that the monetary impulses induce greater changes in nominal income and price level than in real income. The empirical results derived from the application of the St. Louis Model on a short-term basis support a middle ground position between Monetarists and Fiscalists: the monetary and fiscal impulses exert about the same magnitude effect (about 1.5) on economic activity in a year. On a medium-term basis, however, monetary impulses have a more lasting effect on nominal income, while the effects from the fiscal impulses disappear mainly because of the crowding-out effects.

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