Econ 191: Spring 2012: U.C. Berkeley: Fiscal Policy in the Great Recession (April 17, 2012)
Readings:
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:
- The Basic Arithmetic of Self-Financing Fiscal Policy
- The Not-so-Simple Arithmetic of Fiscal Policy in a Depressed Economy
- Under These Circumstances, a National Debt Is Indeed a National Blessing
- The Changing Multiplier since 1925
and, on monetary policy:
- Thoughts on the Limits of Monetary Policy in a Liquidity Trap
- On the Fed's Policy of Quantitative Easing
and, on hysteresis:
- The Shadow Cast by the Downturn: Many Zeroes and Double-Zeroes on the Global Roulette Wheel
- Hysteresis and the American Unemployment Problem
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
Examples:
- 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:
- 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:
Overview:
- 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
