Fiscal and monetary policy lags â¢ Automatic stabilizers ...

More documents

Recommendations

Info

Blinder, Alan, "Central Banking in a Democracy," Economic Quarterly, FRB of Atlanta, Fall, 1996.Cechetti, Stephen, “Policy Rules and Targets: Framing the Central Banker’s Problem,” Economic PolicyReview, FRB of New York, June, 1998.Clarida, Richard, et. Al., “The Science of Monetary Policy: A New Keynesian Perspective,” Journal ofEconomic Literature, December, 1999.Clark, Todd, "Nominal GDP Targeting Rules: Can They Stabilize the Economy?" Economic Review, FRBof Kansas City, Third Quarter, 1994.Cogley, Timothy, "Why Central Bank Independence Helps to Mitigate Inflationary Bias," EconomicLetter,FRB of San Francisco, May, 1997.Diebold, Francis, “The Past, Present, and Future of Macroeconomic Forecasting,” Journal of EconomicPerspectives, Spring, 1998.Dittmar R. and Gavin, W., ”What Do New-Keynesian Phillips Curves Imply for Price-Level Targeting?”Review, FRB of St. Louis, March/April, 2000.Fischer, Stanley, "Why Are Central Banks Pursuing Long-Run Price Stability?" in Achieving PriceStability,FRB of Kansas City, 1996.Friedman, Benjamin, "Targets, Instruments, and Indicators of Monetary Policy," Journal of MonetaryEconomics, October, 1975.Havrileski, Thomas, "Electoral Cycles in Economic Policy," Challenge, July/August, 1988.Heller, Walter, "Activist Government: Key to Growth," Challenge, March/April, 1986.Koenig, Evan, “Is the Fed Slave to a Defunct Economist?” Southwest Economy, FRB of Dallas,September/October, 1997King, R. and Wolma, A., "Inflation Targeting in a St. Louis Model of the 21 st Century," Review, FRB ofSt. Louis, May/June, 1996.Melzer, Thomas, “Credible Monetary Policy to Sustain Growth,” Review, FRB of St. Louis,July/ August, 1997.McNees, Stephen, "An Assessment of the 'Official' Economic Forecasts," New England Economic Review,July/August, 1995.McNees, Stephen, "How Large Are Economic Forecast Errors?" New England Economic Review,July/August, 1992.Poole, William, "Monetary Policy Rules?" Review, FRB of St. Louis, March/April, 1999.Poole, William, "A Policy Maker Confronts Uncertainty," Review, FRB of St. Louis, September/October,1998.Rudebusch, Glenn, "Is Opportunistic Monetary Policy Credible?" Economic Letter, FRB of San Francisco,October 4, 1996.Stark, T., and Taylor, H., "Activist Monetary Policy for Good or Evil? The New Keynesians vs. the NewClassicals," Business Review, FRB of Philadelphia, March/April, 1991.Svensson, Lars, “Price Level Targeting vs. Inflation Targeting: A Free Lunch?” Journal of Money, Credit,and Banking, August, 1999.Learning Objectives:• Students should be able to define inside and outside lags and explain their importance in assessingactive stabilization policies.• Students should understand the concept of automatic stabilizers.109
• Students should be aware that the workings of the economy are still not completely understood, andthat many questions remain unanswered, including how expectations are formed and what the basesfor the private sector's reactions to policy measures are.• Students should be aware that poor information and uncertainty about the accuracy of economicmodels may lead to policy measures that are ineffective or even destabilizing.• Students should know the pitfalls of a cold turkey approach versus a gradualist approach.• Students should be familiar with the instruments, indicators, and targets of monetary policy.• Students should be aware of the difference between real GDP targeting, nominal GDP targeting, andinflation targeting.• Students should be aware that the “rules versus discretion” approach often implies a tradeoff betweenflexibility and credibility and should be able to discuss the merits of each policy approach.• Students should understand the concept of dynamic inconsistency.• Students should be able to discuss the desirability of an independent central bank.Conceptual Problems:Solutions to the Problems in the Textbook:1. The first question you should ask yourself as a policy maker is whether a disturbance is transitory orpersistent. You should then ask yourself how long it would take to put a suggested policy measureinto effect and how long it will take for the policy to have the desired effect on the economy. Inaddition, you need to know how reliable the estimates of your advisors are about the effects of thepolicy. If a disturbance is small and probably transitory, you may be best advised to do nothing,because any measure you take is likely to have its effect after the economy has recovered. Thereforeyour action might only further aggravate the problem.2.a. The inside lag is the time it takes after an economic disturbance has occurred to recognize andimplement a policy action that will address the disturbance.2.b. The inside lag is divided into three parts. First, there is the recognition lag, that is, the time it takes forpolicy makers to realize that a disturbance has occurred and that a policy response is warranted.Second, there is the decision lag, that is, the time it takes to decide on the most desirable policyresponse after a disturbance is recognized. Finally, there is the action lag, that is, the time it takes toactually implement the policy measure.2.c. Inside lags are shorter for monetary policy than for fiscal policy since the FOMC meets on a regularbasis to discuss and implement monetary policy. Fiscal policy, on the other hand, has to be initiatedand passed by both houses of the U.S. Congress and this can be a lengthy process. The exceptions arethe so-called automatic stabilizers; however, they only work well for small and transitorydisturbances2.d Automatic stabilizers have no inside lag; they are endogenous and function without specificgovernment intervention. Examples are the income tax system, the welfare system, unemploymentinsurance, and the Social Security system. They all reduce the amount by which output changes inresponse to an economic disturbance.110
Page 1 and 2: CHAPTER 8POLICYChapter Outline:•
Page 3 and 4: policy runs the danger of failing i
Page 5: Having been exposed to a great numb
Page 9 and 10: monetary growth rate should be incr
Page 11 and 12: 3.a. Since the government multiplie
Page 13 and 14: monetary policy of the Fed over the
Page 15 and 16: the relative merits of the two appr
Page 17: expectations by following a monetar

Fiscal and monetary policy lags â¢ Automatic stabilizers ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?

Fiscal and monetary policy lags â¢ Automatic stabilizers ...