FISCAL POLICY AND TIMING LAGS

FISCAL POLICY AND TIMING LAGS - RECOGNITION LAG (or...

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SECTION 25: FISCAL POLICY AND TIMING LAGS
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DISCRETIONARY FISCAL POLICY Deliberate changes in government spending and taxing to influence the economy COUNTER-CYCLIC POLICY: When the economy is contracting, we should try to stimulate the economy. When the economy is expanding too rapidly, we should try to dampen the economy a bit.
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A balanced budget amendment is pro -cyclic . Enforcing a BBA during a recession will make the recession worse.
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TIMING PROBLEMS WITH FISCAL POLICY By the time a policy is enacted and takes effect, it is possible that it is no longer needed
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TRYING TO CURE A RECESSION IS SIMILAR TO CURING A FEVER Suppose a fever will last 5 days It takes 2 days to realize that you have the fever (recognition lag; observation lag)
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It takes 2 days to get to the doctor who prescribes medicine (administrative lag, implementation lag, legislative lag)
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It takes 2 days for the medicine to take effect (execution lag, operation lag) But now, the cure is not needed The fever has already passed
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“TIMING LAGS ” associated with fiscal policy:
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Unformatted text preview: RECOGNITION LAG (or observation lag) The time it takes for policy makers to recognize that the economy is in a recession IMPLEMENTATION LAG (or legislative lag, or administrative lag) The time it takes to pass laws and put the desired policy into effect. RESPONSE LAG (execution lag, operation lag)) The time it takes for the enacted policy to actually have an effect on the economy FISCAL POLICY DURING THE GREAT DEPRESSION GDP decreased, as did tax revenue The government faced a deficit President Herbert Hoover advocated a balanced budget FISCAL POLICY DURING THE GREAT DEPRESSION To balance the budget, government spending would need to be cut or taxes would need to be increased Either policy would reduce aggregate demand and would make the depression even worse. OPTIMAL FISCAL POLICY DURING THE GREAT DEPRESSION Preferable to advocate increased government spending Preferable to advocate a tax cut Preferable to advocate a budget deficit...
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This note was uploaded on 04/15/2008 for the course ECON 0110 taught by Professor Kenkel during the Fall '08 term at Pittsburgh.

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FISCAL POLICY AND TIMING LAGS - RECOGNITION LAG (or...

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