Fiscal Policy in a Depressed Economy
J. Bradford DeLong,Lawrence H. Summers +1 more
- Vol. 2012, Iss: 1, pp 233-297
Reads0
Chats0
TLDR
In a depressed economy, with short-term nominal interest rates at their zero lower bound, ample cyclical unemployment, and excess capacity, increased government purchases would be neither offset by the monetary authority raising interest rates nor neutralized by supply-side bottlenecks.Abstract:
In a depressed economy, with short-term nominal interest rates at their zero lower bound, ample cyclical unemployment, and excess capacity, increased government purchases would be neither offset by the monetary authority raising interest rates nor neutralized by supply-side bottlenecks Then even a small amount of hysteresis—even a small shadow cast on future potential output by the cyclical downturn—means, by simple arithmetic, that expansionary fiscal policy is likely to be self-financing Even if it is not, it is highly likely to pass the sensible benefit-cost test of raising the present value of future potential output Thus, at the zero bound, where the central bank cannot or will not but in any event does not perform its full role in stabilization policy, fiscal policy has the stabilization policy mission that others have convincingly argued it lacks in normal times Whereas many economists have assumed that the path of potential output is invariant to even a deep and prolonged downturn, the available evidence raises a strong fear that hysteresis is indeed a factor Although nothing in our analysis calls into question the importance of sustainable fiscal policies, it strongly suggests the need for caution regarding the pace of fiscal consolidationread more
Citations
More filters
Journal ArticleDOI
The European Sovereign Debt Crisis
TL;DR: The origin and propagation of the European sovereign debt crisis can be attributed to the flawed original design of the euro as discussed by the authors, and there was an incomplete understanding of the fragility of a monetary union under crisis conditions, especially in the absence of banking union and other European-level buffer mechanisms.
Journal ArticleDOI
Government Spending Multipliers in Good Times and in Bad: Evidence from U.S. Historical Data
Valerie A. Ramey,Sarah Zubairy +1 more
TL;DR: The authors investigated whether U.S. government spending multipliers differ according to two potentially important features of the economy: (1) the amount of slack and (2) whether interest rates are near the zero lower bound.
Journal ArticleDOI
Public debt and economic growth: Is there a causal effect?
TL;DR: This article used an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries and found that there is no evidence that public debt is associated with economic growth.
Journal ArticleDOI
Public Debt and Low Interest Rates
TL;DR: In this article, the authors focus on the costs of public debt when safe interest rates are low and develop four main arguments for public debt rollovers, including the existence of multiple equilibria where investors believe debt to be risky and, by requiring a risk premium, increase the fiscal burden and make debt effectively more risky.
References
More filters
Journal ArticleDOI
Why Does the Economy Fall to Pieces after a Financial Crisis
TL;DR: Hall et al. as mentioned in this paper presented a simple macro model of a fi nancial crisis on output and employment and showed that realistic increases in financial frictions that occurred in the crisis of late 2008 will generate increases in real GDP and employment of the magnitude that occurred.
Posted Content
Monetary policy inertia: fact or fiction?
TL;DR: In fact, empirical evidence on the policy rule obtained by examining expectations of future monetary policy embedded in the term structure of interest rates is very informative and indicates that the actual amount of policy inertia is quite low as discussed by the authors.
Posted Content
Disinflation and the NAIRU
TL;DR: This article found that the NAIRU rose in most OECD countries in the 1980s, and that a central cause was the tight monetary policy used to reduce inflation, which supported the theory of "hysteresis" theories of unemployment.
Journal ArticleDOI
Understanding Policy in the Great Recession: Some Unpleasant Fiscal Arithmetic
TL;DR: This article used the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008-2009, to think about whether the US is headed for a fiscal inflation, and what that inflation will look like.
Posted Content
The Case Against the Case Against Discretionary Fiscal Policy
TL;DR: The Kennedy-Johnson tax cuts were the new, new thing in macroeconomics as a Princeton University freshman in 1963 as mentioned in this paper, and the idea of discretionary fiscal stabilization policy was all the rage.