Tyler Cowen on Free Exchange
Liveblogging World War II: March 8, 1941

Macroadvisers: MA Analysis: The Fiscal Drag from HR1: -.4 pp in '11; -.1 pp in '12

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Macroadvisers: MA Analysis: The Fiscal Drag from HR1: -.4 pp in '11; -.1 pp in '12: MA Analysis: The Fiscal Drag from HR1: -.4 pp in '11; -.1 pp in '12 The House of Representatives has passed the Full-Year Continuing Appropriations Act of 2011 (H.R.1), which would reduce budget authority (BA) for fiscal year 2011 (FY11) below both the level shown in the January CBO baseline and the level asked for by President Obama. Hence, this legislation implies near-term fiscal drag relative to the fiscal assumptions shown in the CBO baseline.[1] Our simulation analysis suggests this near-term fiscal drag would reduce annualized growth of real GDP during the second and third quarters of this year by ¾ percentage point, with smaller impacts for a few subsequent quarters.  Real GDP growth would be lowered by 0.4 percentage point in 2011 (measured fourth-quarter over fourth-quarter) and by 0.1 percentage point over 2012.  This would raise the unemployment rate by 0.3 percentage point by the end of 2012, but with no measurable change in core inflation.  These results assume no monetary response. With the federal funds rate pinned at zero and additional Fed purchases of long-term Treasury debt unlikely, the Federal Open Market Committee (FOMC) has limited ability to offset this drag.  These are short-run effects. Over a longer period of time, the re-allocation of resources from federal to private spending could be expected to raise the level of GDP modestly.  Hence, the issue is not whether to reduce the federal deficit but by how much, how fast, and when. It might be prudent to limit or delay spending cuts until the economy is growing faster and the funds rate is off the zero bound.

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