4C_-_Issues_Stabilization_Policy (2).pdf - Issues on...

  • No School
  • AA 1
  • 32

This preview shows page 1 - 12 out of 32 pages.

Issues on stabilization policy Antonella Trigari December 2012
Image of page 1

Subscribe to view the full document.

Readings G. Mankiw, Macroeconomics , 7th edition, Chapter 15 S. Potter, The Failure to Forecast the Great Recession, Liberty Street Economics, November 25 th 2011
Image of page 2
Plan Should policy be active or passive? Should policy be conducted by rule or by discretion? Time inconsistency in monetary policy Taylor rules
Image of page 3

Subscribe to view the full document.

Should policy be active or passive? Two views Advocates of active policy i th bj t t f t h k th t l d t view the economy as subject to frequent shocks that lead to unnecessary fluctuations in output/employment unless monetary or fiscal policies respond believe that economic policy has been successful in stabilizing the economy Advocates of passive policy argue that monetary and fiscal policies work with long and variable lags , thus attempts to stabilize the economy often end up being destabilizing argue that our understanding of the economy is too limited to be useful in formulating successful stabilization policy believe that incompetent policy is a frequent source of economic fluctuations
Image of page 4
Lags in implementation and effects of policies Long and variable lags greatly complicate conduct of fiscal and monetary policy Two lags are relevant for the conduct of stabilization policy: – Inside lag : time between a shock to the economy and the policy action responding to the shock (it takes time for policy makers first to recognize that a shock has occurred and then put appropriate policies into effect) – Outside lag : time between a policy action and its influence on the economy (policies do not immediately influence spending, income, employment)
Image of page 5

Subscribe to view the full document.

Difficult job of economic forecasting Policy influences economy only with a lag thus a successful stabilization Policy influences economy only with a lag, thus a successful stabilization policy requires ability to predict accurately future economic conditions Example: to assess whether current monetary and fiscal policies should be expansionary or contractionary, need to predict whether in six months or a year the economy will be in a boom or in a recession How do economist forecast? using leading indicators (number of applications for unemployment insurance, consumer sentiment, amount of new orders for capital goods unrelated to defense, S&P 500 stock index,…) using large macro econometric models
Image of page 6
Difficult job of economic forecasting cont Difficult job of economic forecasting, cont.
Image of page 7

Subscribe to view the full document.

Failure to Forecast the Great Recession: Depth of the Recession
Image of page 8
Failure to Forecast the Great Recession: Recent Performance
Image of page 9

Subscribe to view the full document.

Failure to Forecast the Great Recession: Comparison across Forecasts
Image of page 10
Three main failures in NYFed real time forecast Three main failures in NYFed real time forecast Misunderstanding of the housing boom Lack of analysis of the rapid growth of new forms of mortgage finance Insufficient weight given to the powerful adverse feedback loops between h fi i l d h l the financial system and the real economy
Image of page 11

Subscribe to view the full document.

Image of page 12

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes