Kauffman Institute Economic Webloggers' Forum 2012: Recovery and Long-Term Growth
Henry Farrell vs. David Graeber on American "Imperialism"

Econ 191: Spring 2012: U.C. Berkeley: Fiscal Policy in the Great Recession (April 17, 2012)


Readings from David Romer and Christina Romer: Econ 134: Macroeconomic Policy from the Great Depression to the Great Recession:

  • Extending the IS/MP/IA Framework Slides
    • David H. Romer, Short-Run Fluctuations (open access, 2012), Section IV, “The Liquidity Trap”
  • The Zero Lower Bound in Practice Slides
    • Ben S. Bernanke, “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” in Ryoichi Mikitani and Adam S. Posen, eds., Japan’s Financial Crisis and Its Parallels to U.S. Experience, pp. 149-166 (Washington, D.C.: Institute for International Economics, 2000).
    • Peter Temin and Barrie A. Wigmore, “The End of One Big Deflation,” Explorations in Economic History 27 (October 1990): 483-502
    • Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack, “The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases,” International Journal of Central Banking 7 (March 2011): 3-25 and 38- 40 only
  • Does Fiscal Policy Matter? Slides
    • Robert E. Hall, “By How Much Does GDP Rise If the Government Buys More Output?” Brookings Papers on Economic Activity (Fall 2009): 183-195 only
    • Valerie A. Ramey and Matthew D. Shapiro, “Costly Capital Reallocation and the Effects of Government Spending,” Carnegie-Rochester Conference Series on Public Policy 48 (1998): 145-147 and 174-189 only.
    • Christina D. Romer and David H. Romer, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” American Economic Review 100 (June 2010): 763-787 only
  • Fiscal Policy in the Great Recession Slides
    • John Taylor, “The Lack of an Empirical Rationale for a Revival of Discretionary Fiscal Policy,” American Economic Review: Papers and Proceedings 99 (May 2009): 550-555.
    • Christina D. Romer, “The Case for Fiscal Stimulus: The Likely Effects of the American Recovery and Reinvestment Act,” Speech at the U.S. Monetary Policy Forum, February 27, 2009.
    • Council of Economic Advisers, “The American Recovery and Reinvestment Act of 2009 First Quarterly Report,” September 10, 2009, pp. 1-17 and 23-40 only.

Readings from J. Bradford DeLong:

and, on fiscal policy:

and, on monetary policy:

and, on hysteresis:

and, on rhetoric:

Romer and Romer Outlines:

Extending the IS/MP/IA Framework:

The framework extended:

  • Assumptions
    • The nominal interest rate can’t be negative
    • In the basic model, expected inflation equals actual inflation
  • The AD Curve
    • Where we are headed
    • The IS-MP diagram
    • Deriving the AD curve
  • A Little Bit about the Case of Money Targeting


  • A Massive Fall in Planned Expenditure
    • The initial situation
    • The shock
    • The dynamics of the economy
    • What happens when there is a rebound in planned expenditure
    • How seriously should we take this?
  • The Importance of “Using Rather than Saving Your Ammunition”
    • The initial situation
    • What happens if the central bank “saves its ammunition”
    • How the central bank can avoid this outcome

The Zero Lower Bound in Practice:

Strategies for dealing with the ZLB:

  • Starting point: IS shifts back enough that we are in flat portion of MP
  • Fiscal policy
  • Non-standard open market operations (or quantitative easing)
  • Communications policy
  • Deliberate currency depreciation
  • Methods to raise expected inflation
  • Raising expected future real growth

Japan since the collapse of its real estate bubble:

  • Diagnosis of the problem
  • Bernanke’s critique of Japanese monetary policy
  • Japan’s growth record

The United States in the 1930s:

  • Recovery in the 1930s
  • Devaluation as a regime shift
  • Actual fiscal and monetary expansion

The United States since fall 2008:

  • Major IS shock in fall 2008; quickly hit the zero nominal bound
  • Impact of large-scale asset purchases (quantitative easing)
  • Federal Reserve communications policy

Does Fiscal Policy Matter?

Fiscal policy in the IS-MP-IA model:

  • Short-run effects on output and the real interest rate: the IS-MP diagram
  • Effects on output, inflation, and the real interest rate over time: the AD-IA diagram


  • Hall’s regression
  • What question are we trying to answer?
  • Reasons the regression results might overstate or understate the fiscal multiplier
  • Hall’s conclusion

Ramey and Shapiro:

  • How Ramey and Shapiro’s approach differs from Hall’s
  • The Ramey-Shapiro dates
  • Results

Romer and Romer:

  • Romer and Romer’s approach

Fiscal Policy in the Great Recession:


  • Economic Stimulus Act of 2008
  • American Recovery and Reinvestment Act of 2009
  • Additional fiscal actions

Estimated effect of 2008 ESA:

  • Expected effects
  • Taylor’s test
    • Evidence
    • Evaluating Taylor’s approach
  • Another test

Estimated effect of 2009 ARRA:

  • Reasons to expect the effects to be larger or smaller than usual
  • Comparison to a statistical baseline
  • Cross-country evidence
  • A natural experiment