spring - Articles Summaries for the final[1]

spring - Articles Summaries for the final[1] - Ec10 Spring...

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Ec10 – Spring 2006 READINGS SUMMARIES Remember Fiscal Policy? Why Irrelevant? 1) Inside Lag takes a long time to pass bills in Congress - to avoid, its better to change T better than to change G 2) Ricardian equivalence (Barro) - private actions offset FP 3) Don’t have RW, so get crowding out of I Why Relevant? 1) no RE, so crowd out is only partial 2) if MP cant operate, FP is the only option - i = 0 - japan used “quantitative easing” The article addresses the following issues that people often raise against using fiscal as a counter-cyclical measure: Fiscal Policy has less of an effect on the economy than advocates suppose. The reasons are: o Robert Barro’s idea that if governments cut taxes or increase spending, consumers will just increase their saving because they expect higher taxes in the future. Thus, fiscal policy does not effectively boost consumption in times of recession. o Too much public borrowing may raise long-term interest rates, crowding out investment and consumption. Evidence suggests that there is this partial offsetting effect. o People prefer to smooth their spending over time. So if a government enacts a one-time tax rebate, people would not increase consumption today, but rather save it to spread consumption over their life. Fiscal policy takes way too long to implement – there is a big policy lag. The author argues at the end, however, that fiscal policy should not be completely dismissed. The smoothing argument does not find empirical support – researchers find that people do not smooth nearly as much as the PIH predicts. Also, the alternative is monetary policy, and now, at the time of low interest rates and low inflation, there not much lower that interest rates can go and so M policy isn’t as useful. Finally, speed of fiscal policy is what we should focus on. The solution might be to make American fiscal policy more automated. This goes back to Mankiw’s point about the usefulness of rules – should be have a fiscal policy rule? And even further, should we create an independent fiscal policymaking institution, similar to the Fed? (There is evidence that independent central banks perform better.) 1
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What economists do (Lucas) - used contractionary MP to cause a recession - basically cut “exchange rate” and money supply in the amusement park To understand the connection between changes in the money supply and economic depressions, Lucas engineers a hypothetical depression at an amusement park. The park is an entirely independent monetary system with a fixed exchange rate (tickets for dollars). The way he makes the depression come is that one day, without any advance notice, he instructs the cashiers to give 8 tickets instead of 10 per dollar. Clearly, no one is induced to buy more tickets than if the experiment hadn’t taken place, and many people will buy fewer tickets, and thus the total number of tickets in circulation – the “money supply” – will drop. What are the effects on the “economy” of the amusement park? Customers aren’t spending as much, which decreases the revenues (the “GNP”) and
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This note was uploaded on 04/07/2008 for the course SOC-ANAL 10 taught by Professor Mankiw during the Fall '05 term at Harvard.

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spring - Articles Summaries for the final[1] - Ec10 Spring...

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